1. Process and impact of market liberalisation: Worldwide trends Dr Tim Kelly, ITU Tuesday Session 1 CTO Senior management seminar: Telecoms restructuring and business change Malta, 17-21 May, 1999 The views expressed in this paper are those of the author and do not necessarily reflect the opinions of the ITU or its membership. Dr Kelly can be contacted at Tim.Kelly@itu.int.

2. Agenda Market liberalisation: Trends Why? Where? When? How fast? WTO market liberalisation process Alternatives to competition/privatisation Build/Transfer arrangements Impact on tariff rebalancing Universal service concerns Does competition bring the expected benefits?

3. Degree of competition in basic services, 1998, by region Source: ITU Telecommunication Regulatory Database. 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% AfricaAmericasArab States Asia- Pacific Europe Monopoly Competition

4. Status of competition by market segment, worldwide, 1998 Source: ITU Telecommunication Regulatory Database. International Local Long distance 47% Competition 53% Monopoly 56% Competition 44% Monopoly 54% Competition 46% Monopoly

5. Degree of competition in mobile services, by region, 1998 Source: ITU Telecommunication Regulatory Database. 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% AfricaAmericasArab StatesAsia-PacificEurope Monopoly Competition

6. Why introduce competition into the Sector? To introduce fresh investment and/or foreign investment into the Sector Existing network may be ageing or poorly maintained Existing operator may be debt-ridden or financially constrained To introduce innovation, price competition and new management techniques To create new business opportunities for local entrepreneurs and other suppliers To create more choice for consumers To improve level of teledensity and pace of network roll-out

7. Competitive markets tend to grow faster than monopolistic ones Source: ITU World Telecom Development Report 1998: Universal Access

8. 0 25 50 75 100 125 150 175 200 199019911992199319941995 Competitive markets Non-competitive markets Source: ITU World Telecommunication Development Report, 1996/97. Growth in international traffic per line, in emerging markets (1990=100)

9. Different approaches to market liberalisation Introduce competition first in mobile and value-added, and only later in basic services e.g., South Africa has had mobile competition since 1994 (Vodacom and MTN) but Telkom SA has an exclusivity until 2003/4 over basic service. Introduce a duopoly for a period followed by more open competition e.g., UK introduced duopoly (BT/Mercury) in 1982 but went for full competition in domestic services in 1991 and in international service in 1996. Go for big bang approach to market liberalisation e.g., SwissCom had full monopoly in Switzerland until 1998; now open competition.

10. From duopoly to competition... Source: ITU World Telecom Developm ent Report 1998: Universal Access

11. Trade in telecoms: The WTO process Dual role of telecommunications As a facilitator of trade in other sectors (GATS) As a directly traded product and service (BTA) How can telecom services be traded? Modes of delivery Cross-border (e.g., international calls) Commercial presence (e.g., Foreign Direct Investment) Consumption abroad (e.g., calling cards) Movement of staff (e.g., consultancy services) Total value of telecoms trade around US$120 bn in 1998 (principally equipment)

12. WTO timetable 1986-1993: Uruguay Round 15 April 1994: Marrakech Treaty (GATS) 1994 - 1997: Group on Basic Telecommunications (GBT) April 30 1996: Standstill Feb 15 1997: Basic Telecommunications Agreement (BTA) April 1997: Information Technology Agreement (ITA) 5 February 1998: Implementation of BTA November 1999: New round launched in Seattle?

13. General Agreement on Trade in Services (GATS) principles Most-favoured nation (MFN), Article II Transparency, Article III Domestic regulation, Article VI: qualification requirements and procedures technical standards licensing requirements Monopolies and exclusive service supply (Article VIII) Market access (Article XVI) National Treatment (Article XVII)

14. Countries permitting competition in basic telecoms: 199019951998 Japan United Kingdom United States Australia Canada Chile Finland Japan Korea (Rep.) New Zealand Philippines Sweden United Kingdom United States Australia Austria Belgium Canada Chile China Denmark El Salvador Finland France Germany Ghana Hongkong SAR Israel Italy Ireland (Dec 98) Japan Korea (Rep.) Mexico New Zealand Netherlands Norway Philippines Russia Spain (Dec 98) Sweden Switzerland Uganda UK USA plus others....

15. 35% 46% 74% 85% 1990199519982005 Mono- poly Compe- tition 4142948 Number of countries permitting more than one operator for international telephony Percentage of outgoing international traffic open to competition Note: Analysis is based on WTO Basic Telecommunications Commitments and thus presents a minimum level of traffic likely to be open to competitive service provision. Source: ITU, WTO.

16. Level of competition in international services in WTO basic telecoms agreement Competition Monopoly Source: ITU Telecommunication Regulatory Database.

17. African countries making GATS commitments to liberalisation Côte dIvoire Full competition by 2005 Ghana Duopoly for five years, then review Mauritius Competition by 2004 Senegal Competition some time between 2003-2006 South Africa Competition by 2003 Uganda Duopoly, 1998-2003; thereafter review

18. Alternatives to introduction of competition Liberalisation of sectors other than basic telecoms mobile communications public payphones Internet Service Providers Award of franchises for different regions comparative or peer competition, but not in same geographic area (e.g., Indonesia) Award of build/transfer arrangements Build Operate Transfer (BOT), Build Transfer Operate (BTO), Build Own Operate Transfer (BOOT) etc (e.g., Thailand)

19. Examples of strategic foreign investors in mobile, SADC

20. Private sector participation through Build/Transfer - 1 2 3 4 5 6 7 1990199119921993199419951996 0 1 2 3 4 5 6 7 Pre- Build / Transfer Post- Build / Transfer Tele- density Contractors TOT Thailand Two build/transfer agreements were signed between TOT (Incumbent) and: Telecom Asia (92) for 2.6 million lines TT&T (93) for 1.5 million lines to be completed by end-1996 Source: ITU World Telecommunication Development Report 1998: Universal Access

21. Regional franchises (KSOs): Indonesia

22. Impact of competition on tariff reform Historically, tariff structures have used cross- subsidy to fund low-priced connection, line rental and local call services from high-priced long-distance and international calls Competitors will target those market segments where potential returns are greatest Technology is tending to reduce the distance and duration element of tariff structures Competition will hasten trends towards cost- oriented tariffs Interconnection becomes critical to market evolution Should regulator mandate terms for interconnection or leave it to the market?

23. 0 2 4 6 8 10 12 19901991199219931994199519961997 300 minutes, local calls 3 mins Int'l call to US Monthly line rental Tariff rebalancing trends, in US$ Average of 39 major economies Source: ITU World Telecommunication Indicators Database.

24. $12.83 $12.05 $9.75 $9.39 $8.94 $8.91 $8.53 $7.22 $7.11 $5.15 $4.16 $4.12 $3.43 $3.19 Argentina S. Africa Mexico Average Brazil Hongkong Philippines Indonesia Malaysia India Venezuela Turkey Russia Thailand Monthly residential subscription, in US$: Selected countries plus World average Source: ITU World Telecommunication Indicators Database.

25. … lead to faster growth rates Monthly residential subscription charges, US$ $- $2 $4 $6 $8 $10 1990199119921993199419951996 Uruguay Malaysia Hungary Morocco Percentage of households with telephone 0 10 20 30 40 50 60 70 1990199119921993199419951996 Malaysia Hungary Uruguay Morocco Higher monthly subscription charges... Source:ITU World Telecommunication Development Report, 1998: Universal Access.

26. As competitors gain market share... Long distance prices come down... Source: ITU Asia-Pacific Telecommunication Indicators, 1997.

27. Universal service: Fears and responses Competitors will only invest in most profitable areas (cherrypicking) and will avoid rural areas Use license obligations to ensure that a prescribed minimum of investment reaches target Competitors will put incumbent operator out of business Incumbents have generally done better once competition is introduced Competition will mean super-serving existing users not reaching new users Teledensity grows faster under competition Competition means foreign ownership Liberalisation can create local entrepreneurs (e.g., EcoNet in Zimbabwe, private telecentres in Senegal)

28. Teledensity in Philippines (competitive) and Pakistan (monopoly) 0 0.5 1 1.5 2 2.5 3 198919901991199219931994199519961997 Philippines Pakistan Introduction of competition in Philippines

29. The benefits of liberalising the market for privately-operated payphones Payphones can be used to extend access to under-served regions Privately-operated payphones can form basis for teleshops, telecentres In Senegal, operators of private telecentres receive discount on price of calls Telecentres in Senegal employ more people than SONATEL Source: ITU World Telecom Indicators Database.

30. Positive impact of competition on Telstra (Australia) - 2 4 6 8 10 12 14 1990199219941996 Revenue (US$bn) - 0.5 1.0 1.5 2.0 Profits (US$ bn) Revenue Profit

31. Conclusions: Getting the recipe right Identify objectives of introducing competition What are the measures of success? What are the concerns of incumbent, unions, consumers? Define a long-term market strategy Sequencing of competition in different market sectors Timing of competition vis-a-vis privatisation Establish licensing procedure and regulator Address interconnection issues Interconnection will make or break competition Set out strategy for achieving Universal Access / Universal Service