Roger Marinzoli Issue: Latin America I 1999
Article no.: 10
Topic: Broadening Telecoms Market Access in Brazil
Author: Roger Marinzoli
Title: Vice President
Organisation: Global Privatisation and Telecommunications Group
PDF size: 36KB

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Article abstract

Brazil is a unique example of the thought behind a thorough and comprehensive approach to addressing under-development. The policies of liberalisation and privatisation were adopted by the Government to build a bold and creative model for achieving social welfare through telecommunications services growth. The explosion of new services available through the information superhighway will pressure a shift from the concept of the right to access and affordability to one of universal services provision.

 

Full Article

When Alexander Graham Bell invented the telephone, he envisioned a new means of communication that would bridge distances and bring people closer. Over one hundred years later, the telephone has become a society-transforming device, spurring economic growth and driving the information revolution. Developed nations treat it as a utility, while developing nations view it as a panacea. The distribution of modern telecommunications – whether the Plain Old Telephone System (POTS) or the more recent information superhighway – has ignited concern over the ability of the world’s populace to have access to the global network of the 21st century. Universal Access is not new The concept of universal access or universal service, is not new; indeed, it was one of the principal reasons for states to take control of telecommunications systems in the past century. But as the economics of network management began to change, states implemented the policies of privatisation, liberalisation, and commercialisation to ensure that the ‘have-nots’ would gain access. Nowhere was this more evident recently than in the privatisation of Telebras, which was one of the world’s largest privatisations and probably the most complex telecommunications sector transformation ever. In 1995, Brazilian authorities took the first step in officially recognising information technology and telecommunications as the key to the country’s long-term socio-economic development. The reform and modernisation of the telecommunications sector was included as one of the pillars of the Government’s reform program, known as ‘Maos a Obra’ (translated as Let’s Get to Work). This program formally recognised the deficiencies of the country’s existing telecommunications infrastructure and defined telecommunications development according to the Brazilian reality. The basic telecommunication indicators at the time clearly pointed to the condition of severe under-investment in Telebras’s basic telephony infrastructure; fixed-line penetration lingered at 9.5%, the network had a low level of digitalisation, the waiting lists in most urban centres were extraordinary, waiting time could last up to 2-years, and call completion rates were very low. What the Brazilian Government then realised was that connecting to the 21st century would require a thoughtful, visionary reform process and substantial investments. Challenges and Solutions The policy choices adopted by the Ministry of Communications resulted from a two-year assessment of the issues confronting the Brazilian telecommunications sector. The Ministry established a series of objectives, which included: · increasing telecoms access throughout the country; · improving the quantity and the quality of the service offerings; · increasing investment in the sector; and, · commercialising the Telebras system. In evaluating the policy options to achieve these objectives, the Ministry analysed the techniques, mechanisms, and precedents for telecommunications sector reform around the world. The Ministry retained the services of a number of external consultants in 1996, which included the International Telecommunication Union (ITU), Lehman Brothers, Dresdner Kleinwort Benson, and McKinsey & Co. to assist it in this process. Together with its advisors, the Ministry began to shape a strategy that was unique to Brazil in terms of its comprehensive nature and the speed of its implementation. The objective of increasing telecommunications access and services presented substantial challenges. As with all large, underdeveloped countries, there were several dimensions to be considered by the advisors. Firstly, the existing Public Service Telecommunications Network (PSTN) was built and operated by Telebras, a cumbersome and inefficient state-owned monopoly. Although the network was widely distributed over the vast expanse of the Brazilian topography, it did not adequately meet the needs of the residential or business communities. Moreover, the diversity of the network components that evolved from a public procurement process resulted in problems with service quality and systems integration. Secondly, both the monopoly status of the telecommunications sector and the low levels of government investment led to a significant disparity between telecommunications access across income groups; installation was expensive, waiting lists were large, and connection times were long. Since the state-owned, supply-driven model had not worked, development would have to be accelerated through either: · the opening of the sector to private investment; · a redefinition of the regulatory framework in order to promote consumer welfare and universal access; or, · a combination of the two. Round One – Creating the Framework for Market Development The policy debate in 1996 focused principally on the first alternative, which required the elaboration of a view on the future industry structure in Brazil. If a single, state-owned company could not achieve the Ministry’s objectives, then how many private companies were optimal for social development? Could the separation and the privatisation of the 28 existing Telebras operating subsidiaries serve as the basis for the future industry, or were new competitors needed to reach the marginal user? Would graduated competition be more constructive for consumers rather than a Sachs-like ‘big-bang’ approach? Most importantly, how would the global revolution in communication technology be confronted, in terms of broadening market access? By the middle of 1997, the Ministry had addressed many of these issues and codified a number of reform initiatives in the General Telecommunications Law. Smith’s ‘invisible hand’ was adopted as the guiding principle for commercialising the PSTN, and free market competition was viewed as the best means of servicing the population. Telebras was to be regionalised before privatisation, so as to create competitive incumbents with substantial economies of scale and scope. Telebras was also to be segmented by line of business, so as to allow more flexibility for the fast-growing long distance, wireless, and data communications businesses. The timing of competition remained an issue for deliberation, however; although the principle of ‘immediate competition’ was embedded in the legal framework, the Ministry and its advisors were attempting to balance the societal gains of competition with the ability to protect the divestiture value of the restructured Telebras companies. While these policies established the framework for increasing telecommunications access, they were not sufficient to guarantee the promotion of universal service and consumer welfare. Liberalisation per se, was indeed proven to bring efficiency and growth to telecommunications markets, but left to their own profit-seeking motives, new competitors would tend to target the business and high-end users. Additionally, new competitors would attempt to lease existing facilities, rather than increasing capacity, if network build-out proved expensive. Moreover, the regionalised Telebras companies would become the incumbent players and could utilise dominant market power to control pricing and ‘cherry-pick’ service territories. The Ministry and its advisors therefore had to consider another series of policy measures to direct investment and defend consumer interest. Round Two – Promoting Public Welfare In October 1997, the Ministry created the independent regulatory agency ANATEL, which was tasked with defining the relevant universal access policies and the accompanying monitoring, enforcement and funding mechanisms. ANATEL was mandated with the responsibility of guaranteeing widespread access to telecommunications in an affordable, equitable and non-discriminatory manner. To address the challenge of universal access, the Ministry and ANATEL chose to mandate specific expansion targets, following the example of many countries, from Argentina to Thailand. The targets were carefully determined to achieve accelerated growth in the network, irrespective of topography and economics. The result was a set of broad, regional targets, levied on both the incumbent and new competitors that force supply-side growth. Additionally, the Government mandated the installation of public-phones in specific areas determined by population and distance (a telephone per ‘x’ kilometres) in part to overcome the cost related problem of build-out and accelerate the process of providing access. Although these sets of targets were considered too aggressive, the Government chose to be bold and instead offered an incentive for building-out and installing the required number of telephones; as operators fulfilled their targets, any restrictions limiting their ability to fully compete would be removed earlier rather than later. The Ministry and ANATEL realised that the installation of telephone lines did not in and of itself guarantee universal access – affordability of access and service was an essential variable in the equation. The Ministry approached this issue on two fronts. On one side, it adopted a tariff policy that benefited all consumers by capping increases in tariffs at the level of inflation, while at the same time forcing gradual real decreases in prices (a price cap mechanism with an efficiency factor). On the other front, the Government recognised the regressive aspect of such tariff policy and the need to resolve the problem of non-affordability directly through subsidies. While cross-subsidies had traditionally been the method for ensuring affordable tariffs, they led to the misallocation of resources and acted as a constraint on long-distance growth. To circumvent this problem, the Brazilian Government adopted an increasingly popular alternative, that of the Universal Service Fund (USF). Rather than directly subsidising the consumer, the USF’s purpose would be to subsidise the cost of providing telecommunications access to the operators themselves. The burden of funding the USF would be borne not by the Government or solely the incumbent, but would fall to all operators. Once the tools to address under-development had been defined, one more issue regarding universal access policy remained outstanding – that of competition timing. The question was left unresolved in 1996 and continued to result in polemical debate regarding the benefits of immediate competition versus phased competition. What framework would allow and even create the incentive for the sector to develop most rapidly and equitably? The Government opted to endorse both immediate and phased competition, and created a model of duopolistic beginnings followed by full competition after a period of no longer than 5 years. Mirror licenses specific to the lines of businesses (fixed-line, cellular and international long-distance) were issued to compete with the respective incumbents, only a few months after the Telebras privatisation. And, the full benefit of a fully liberalised industry was reserved for a later date, allowing incumbents and mirror companies sufficient time to fulfil their obligations and acquire a competitive edge. Assessing the Policies Brazil is a unique example of the thought behind a thorough and comprehensive approach to addressing under-development. The policies of liberalisation and privatisation were adopted as a means to enhance overall network development, from which point the Government built a bold and creative model for achieving social welfare through telecommunications services growth. The perogatives were to: · force both supply-side (expansion targets) and demand-side ( competition) growth; · creatively reassess universal access and service options (for example, making voice-mail-boxes available to those individuals without a telephone); and, · instil a real sense of urgency as to need to reach the ‘have nots’ in Brazil. In a final review of the policies implemented by the Ministry and ANATEL, it is fair to say that overall, the appropriate measures have been taken. In the short-run, a clearly defined regulatory framework has been established to correct the inefficiencies of the market, whilst removing the Government from its interventionist role. Perhaps, on a cautionary note, the Government should reassess the expansion targets, which today leave room for operators to ignore the difference between business and residential lines, whilst still complying in terms of the physical number of lines. Also, even though the creation-of a universal service fund has been called for in the General Telecommunications Law, as of today, little more than textual advances have been made in specifying the mechanics of such fund. In the, long run, full liberalisation as envisioned by the Ministry will allow the market to create new opportunities using technological innovation. Where in the past, for example, rural telephony and low-income residential customers were seen as unprofitable, today, with the introduction of Wireless Local Loop (WLL), Global Mobile Personal Communications by Satellite (GMPCS) and innovative uses of public telephones has allowed these pockets of populations to be reached in a cost effective manner. Conclusion In the future, however, as current policies are brought to fruition, the Government will be confronted with new regulatory issues. The explosion of new services available through the information superhighway, from internet access to advanced tele-services, will continue to pressure the Government to shift from the concept of the right to access and affordability to one of universal services provision. This will require redefining what services are deemed to be universal, in the context of the Brazilian reality, and designing more progressive tools to integrate the country into the third industrial revolution.Conclusion In the future, however, as current policies are brought to fruition, the Government will be confronted with new regulatory issues. The explosion of new services available through the information superhighway, from internet access to advanced tele-services, will continue to pressure the Government to shift from the concept of the right to access and affordability to one of universal services provision. This will require redefining what services are deemed to be universal, in the context of the Brazilian reality, and designing more progressive tools to integrate the country into the third industrial revolution.