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

2. 2 Outline  Why reform for competition  Key aspects of reform process  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

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

4. 4 Post-reform LP Gas Telecom Pre-reform

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

6. 6 Lessons from telecom reforms, 1991-2003  Competition is key 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  115,000+ mobiles were in operation in North & East within months of ceasefire  Monopolies are harmful Uncertainty created by 5-year international exclusivity harmed the entire sector, including the beneficiary

7. 7 Lessons from telecom reforms, 1991-2003  But regulation is necessary for competition and growth 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  Failure was partly due to ambiguous exclusivity granted at privatization

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

9. 9

10. 10 Competition wherever possible; regulation where necessary  Principle recognizes that markets (decentralized decision making) are 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

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

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

13. 13 Is competition law sufficient to meet telecom challenges  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?

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

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

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

17. 17 Towards a new framework for competition in telecom: Institutional mechanisms  Concurrent jurisdiction (e.g., South Africa): clear demarcation of role of competition authority and sector regulator 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) Choice may depend on country/market size

18. 18 Example: Public Utilities Commission Act, 35 of 2002  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 Electricity Reform Act 34 of 2002 Petroleum Sector Reform Bill?  Also addresses independence and capacity problems of Competition Authority

19. 19 Independence  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

20. 20 Capacity  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?

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

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