|Issue:||Latin America III 1997|
|Topic:||Can Regulation and Technology Lead to Effective Competition in Telecommunications Services?|
|Author:||Dr Ignacio Mas|
Most Latin American countries are beginning to adopt new regulatory models in the light of telecommunications liberalisation and competition. This article highlights fourbottlenecks that constitute the core of the regulatory problem, and how abuse by operators who own or control these ‘bottleneck’ resources can be avoided. Regulatory solutions should avoid simply substituting a market bottleneck with an administrative one, but to look at how technological advancement can encourage the increasing deregulation of telecommunications services.
New Paradigm in Telecommunications Regulation Most countries in Latin America are in the process of revamping their regulatory structure for the telecommunications sector. Chile led the way in reform and modernisation, achieving full liberalisation of long-distance carriage in 1994. Argentina and then Peru also broke the State monopoly by splitting and then privatising the former monopolist provider. In Colombia and, to a lesser extent, Brazil, deregulation is picking up momentum, although the privatisation agenda is delayed. In contrast, the monopolist provider in Venezuela has been privatised, but competition in basic telephony services is not expected to set in until after the year 2000. Bolivia, Panama and El Salvador have also recently privatised their telecommunications operators. The stale model of pervasive government operator ownership and control in the public interest is giving way to a new regulatory model based on the following insights: · In Latin America, with the large shortfall in infrastructures, the fundamental objective of telecommunications legislation and regulation must be to induce new investments. Without new investment, the other public policy objectives, protection of consumers’ interests, quality of service, universal service, the emergence of strong, internationally viable domestic telecommunications groups etc., cannot be realised. Government fiscal realities make it unrealistic for the state to assume the cost of any significant telecommunications infrastructure drive. Thus, legislation and regulation tends to be more unabashedly pro-private investment. · The government should not be in the business of ‘second-guessing’ the business prospects of the various actual, or potential, players. This suggests a more liberal entry policy, one that is not geared towards picking the ‘right’ groups, or forcing particular business models on them. Licensing policies increasingly tend to be less biased towards securing a small number of protected, vertically-integrated operators. · The incentives for private efficiency, effort and risk-taking in the provision and operation of telecommunications networks need to be made compatible with a regulatory structure designed to ensure that broader social objectives are met. However, the emphasis is on limiting a government’s involvement in private business decisions to those areas where private and public interests are likely to diverge substantially. To put it another way, regulations seek to ‘ring-fence’ those areas where private initiative should not be undermined or tampered with. Such broad reform initiatives must be informed by formal economic analysis of the proper role of regulation in the provision and operation of telecommunications services. In particular, regulators must have an understanding of how regulatory and institutional structures influence market structures and outcomes. Why Regulate at all? There are four bottlenecks that constitute the core of the regulatory problem in the telecommunications sector. Local Loop Infrastructure Fixed calls originate and terminate at particular pairs of copper wires. These bits of copper wire, scarcely a millimetre in diameter, often constitute a monumental barrier to entry and competition. Duplication of facilities by potential competitors would be extremely costly and in many cases socially undesirable. Individual subscribers are captive customers of their local access provider and entrants cannot tap into an established local access provider’s customer base without its agreement. Established local access providers can then use the monopolisation of their customer base to vertically integrate themselves to provide downstream services which would otherwise be intrinsically competitive. Radio Spectrum Mobile access solves the infrastructure bottle neck problem, as the access assets required (both the base stations and the handsets) can be used to serve different customers, or even redeployed in different locations. This has the twin advantages of reducing the risk to potential entrants from challenging the incumbent and of mitigating the risk of inefficient deployment of assets. However, radio spectrum is a limited resource with many competing uses. Problems in the allocation of spectrum will distort conditions in the underlying markets as it can become a tool for extending market power to all services delivered using radio spectrum. Signalling and Transmission Standards The utilisation of specific standards can become significant bottlenecks as they can be used as an excuse for preventing the inter-working of networks. Without network interoperability, network size becomes all important, as the users’ value is directly related to the number of people they can call and receive calls from. Numbering system Finally, the numbering system can be an effective constraint against competition if numbers (another basic requirement for network interoperability) are not available to all operators on an equal basis, or if renumbering imposes large switching costs to users. Consequently, a recurrent question is, how can the regulator avoid abuse of dominant position by operators who own or control these ‘bottleneck’ resources? Technology is Slaying the Bottleneck Dragons The bottlenecks can be tamed through an appropriate mix of regulation and deregulation. However, in the long-term, it is technological advancement that will make it possible to reduce the scope of these bottlenecks. We are already seeing this with cellular access technologies, which are providing effective competition to fixed services in urban environments. As mobile services become more affordable, they will offer contestability market discipline to fixed access networks. The spectrum availability bottleneck in wireless services will be eased or even eradicated by new spectrally efficient standards, and multiple-mode systems which permit a migration of existing systems to different frequency bands in response to market signals on relative frequency band scarcities. The emergence of these new technologies will be supported by a more market-based frequency allocation process which adequately reward providers who exploit spectrum more efficiently, or in the less congested bands. Greater reliance on market-based allocations and supporting technological advances can also help mitigate the potential numbering bottleneck. In the future, governments will auction off the entire numbering capacity, creating a true free market for numbers. In such a world, operators wanting to expand their client base would need to procure some new numbers in the open market. Of course, this is only feasible as long as their networks are sufficiently flexible and intelligent to handle full number portability. In the case of signalling standards, interoperability will tend to be ensured through configurable software equipment that will be able to interface with other equipment through a variety of standards. Moreover, programmable software will be downloadable, which will reduce the cost of adopting different standards for specific communications or links. Wither Regulation? Technology will undoubtedly encourage the increasing deregulation of telecommunications services, but is not likely to make it totally superfluous any time soon. The emerging model is one where large business customers located in the main cities face competitive provision choices, but the bulk of the residential population who remain being served by a single operator will not. Significant numbers of customers will not be able to enjoy competitive provision as long as tariffs are averaged nationally – i.e., as long as tariffs do not reflect the cost of provision to individual users. Yet tariff de-averaging does not seem to be a politically viable alternative. As a result, the question is how to ensure that these customers, served by a single facilities provider, can gain access to the full range of carriage and value-added services offered by operators other than their local access providers – and vice versa. shows the scope of regulations that would be needed to ensure full equal access of customers to operators, and of operators to customers. Instituting these regulations is proving to be a complex, expensive and ultimately unsatisfying business. The regulatory frameworks developed in the USA and the UK are two common models for regulation, with which throughout Latin America are heavily reliant on for the costing of network and retail services to determine the reasonableness of access charges and retail tariffs. However, the cost functions of services in the telecommunications sector are characterised by the prevalence of joint (multi-service) costs, economies of scale (non-linearities), and irreversibility. Conclusion In such an environment, there is sufficient ambiguity in cost analysis to support a wide range of positions, which on the one hand weakens the credibility of regulators and on the other hand enhances the regulatory risk faced by private operators. This result is not surprising: regulatory solutions simply substitute a market bottleneck with an administrative one. There is only one regulator, after all.