 | Issue: | Latin America IV 1997 |
| Article no.: | 11 | |
| Topic: | Telecommunications in Latin America:Opportunities and Challenges | |
| Author: | Volker Ziegler | |
| Title: | Information Technology Specialist | |
| Organisation: | World Bank | |
| PDF size: | 24KB |
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Article abstract
Although most Latin American countries are on the path from a state-owned telecommunications sector to private-led competition, many countries still lag behind in terms of basic access to telecommunication services and policy framework. This article explains the various lending and non-lending services provided by The World Bank Group to help governments and private companies in Latin American countries to benefit from the great potential of telecommunications infrastructure development.
Full Article
Introduction The development of telecommunications provides a historic opportunity for emerging economies in Latin America. The availability of private, in many cases foreign, investment and technological innovation make telecommunications a key element of economic change. However, the challenge remains a tremendous one. Although most Latin American countries are on the path from a state-owned telecommunications sector to private-led competition, many countries still lag behind in terms of basic access to telecommunication services and policy framework. Also, with the convergence of voice, data and video traffic, the regulatory challenge is getting increasingly complex. The World Bank Group employs various lending and non-lending services to help governments and private companies in Latin American countries tap the potential of telecommunications services in a converging market environment led by the private sector. It recognises the great potential of telecommunications to enhance economic growth in Latin America and extend the reach of benefits from telecommunications infrastructure development to lower income groups. The Sweeping Wave of Sector Change Privatisations The telecommunications arena in most Latin American countries is increasingly privately owned and competitive. The list of privatisations of telecommunications operators in Latin America is an impressive one. It includes most Latin American countries. In many cases a controlling interest was sold to a foreign strategic partner who typically is a well experienced multinational operator from North America or Western Europe. Obviously, those countries that are liberalising their telecommunications markets in tandem with privatisation efforts are the ones better positioned to benefit from these changes. Figure 1 captures the different stages in which Latin American and Caribbean countries find themselves as far as privatisation is concerned. With the exception of Costa Rica, Paraguay and Uruguay, privatisation of major operators has been implemented or is in progress. All over the region the primary role of governments in the sector has changed (or is changing) from that of owner to that of regulator. Chile, Argentina, Mexico and Venezuela were the first countries to take decisive steps towards restructuring their telecommunications sector and today the list of nations having adopted and implemented measures of reform includes Bolivia, Brazil, Colombia, Ecuador, El Salvador, Honduras, Panama and Peru. Sector Migration from State-Owned to Convergence Competitive Although privatised, telecommunications operators still enjoy the status of quasi-monopoly entities in the basic services sector (including the long-distance segment). Chile is the only telecommunications market in Latin America and the Caribbean that is fully liberalised (although all the regulatory barriers to entry have been removed, competition is still far from perfect) and where there are no significant impediments to convergence. As illustrated in Figure 2, Mexico is also moving in the same direction. In Figure 2, the year of privatisation of the incumbent fixed-network operator is indicated. Four different stages of competition can be distinguished for illustrative purposes: · Fringe competition means competitive supply of a minor share of the overall telecommunication services market (e.g., satellite, cellular or value added services), whereas the major market segment (e.g. the basic telephony services) is not supplied in a competitive manner (assuming negligible effects of substitution); · benchmark competition denotes the approach of awarding licenses to several basic telecommunications operators in distinct geographical regions; · full-fledged competition characterrises the competitive supply of telecommunication services in any given segment (e.g. several fixed-line operators competing in the same market), and; · convergence competition is defined as allowing competition between operators in historically distinct segments (e.g. CATV operators competing with fixed networks telephony operators to offer basic telephony services). Market Growth Service and infrastructure levels in Latin American emerging economies are generally lower than those of developed countries. Corresponding efforts to quickly build up the sector, as well as higher overall economic growth accounts for the strong growth rate in telecommunications access. In main telephone lines, Latin American economies experienced an average annual growth rate of 10.9% from 1990-95 compared to an average growth rate in industrialized countries of only 3.5%. In terms of shares of global telecommunications revenue, emerging economies Brazil, Mexico and Argentina are ranked among the top ten worldwide (WTO ranking of its members and including the EU Member States based on their combined totals). The emerging economies of Latin America in general move towards an economy where information related services account for an increasing percentage of GDP. Role of Foreign Direct Investment After privatisation, private owners tend to pursue new business opportunities leading to continued high investment levels (e.g. in Chile: annual investment in public telecommunications increased from US$ 109 million in 1988 to a peak level of US$ 585 million in 1993, and main lines doubled to 1.5 million between 1989 and 1994; after the implementation of a multi-carrier system the current growth forecast is 4 million subscribers by the year 2000). On average, the level of annual investments in year five (yop+5) after privatisation is five times the level of annual investment prevailing two years before privatisation (yop-2). For example, the extraordinary growth in investment level in Mexico even several years after the first privatisation efforts (see Figure 1) has been funded via consecutive public offerings. Telmex has chosen a strategic equity partner in 1990, and in the following four years public offerings were organized every year. Technological Change as Enabling Factor The cost of transmitting, storing and processing information has decreased dramatically over the last two decades and is forecast to continue to do so. State-of-the-art telecommunications switching and processing equipment benefits from progress in semiconductor technology. It is technological innovation in microwave frequency components integration and compact computing power of processing chips that have led to the major decrease in cost and the large scale availability of digital wireless and satellite technology. Latin American emerging economies profit immensely from the new technologies. Countries in different stages of development in Latin America use radio technology to leapfrog from inadequate or antiquated telephone service to systems that meet their emerging needs. In Mexico, for instance, the planned opening up of local services to competition and the financial viability of competing private operators will be fostered by the availability of wireless local loop technology. This way, very short deployment schedules can be realized and the average installation cost per line is lower compared to the cost for wireline service. A major trend is the increased relative importance of wireless and cable television (CATV) access. In South America the number of new CATV subscribers and cellular subscribers taken together roughly equals the number of new main telephone lines added in 1996. CATV and cellular operators will be potential entrants to the South American basic communications market in the next five years to come. Increasingly, the convergence between voice, data and video traffic will become a reality. Challenges The Rural Urban Gap Teledensity and access to telecommunications services is lower in Latin American rural areas compared to urban areas. The rural urban gap is a worldwide phenomenon that is well known. To make things worse, the severity of the rural urban gap is negatively correlated with the number of main lines per inhabitant. The eight Latin American countries with a teledensity of less than seven per 100 inhabitants, for example, have the smallest ratio of the teledensity in the largest city over the teledensity in the rest of the country (see Figure 2). In a privatised and increasingly liberalised environment, governments in their role as policy makers are increasingly aware of the rural urban gap. Concepts to deal with the problem include the issuing of special rural licenses (e.g. award of rural cellular licenses in Venezuela) and the set-up of rural telecommunications funds (e.g. Peru, Chile). Directions of Sector Regulatory Reform Governments of Latin American countries have increasingly passed legislation to allow competition in the communications sector. In addition, in many countries there is a clear commitment to selling to private interests much of the sector because state telecommunications monopolies mostly failed to meet demand for basic services. New legislation has been passed to clear the way for privatisation and competition, as well as the establishment of regulatory agencies. Key license aspects are also changing. Exclusivity periods become shorter or non-existent, license fees and obligations on the side of the operators grow in size and complexity including quality of service, interconnection and tariff aspects. In general, the amount of private and competitive supply in the telecommunications sector is on the increase in Latin America. At the same time, however, with the increasing convergence of voice, data and video data becoming a reality, regulators face an increasingly difficult market environment. Also, the process of awarding new licenses and opening up the sector can be difficult, especially in time disclosure of relevant data when privatising a state owned operator as well as having clear license award criteria. For example, the award process for some of the Brazilian cellular licenses has recently been referred to the Brazilian courts for settlement. The Role of the World Bank Group The World Bank Group consists of the International Bank for Reconstruction and Development (IBRD), the International Development Association (IDA), the International Finance Corporation (IFC) and the Multilateral Investment Guarantee Agency (MIGA). It is fully aware of the special importance of telecommunications for Latin American emerging economies. It recognises the potential of telecommunications in a competitive, private sector led environment to contribute to poverty reduction by increasing productivity and enhancing economic growth in general (World Bank Operational Policy 4.50, 5/1995). The Bank encourages the separation of the government’s regulatory and policy functions. It supports governments in developing strategies to extend telecommunications services to low-income (for example, rural) communities. The World Bank Group helps design and finance telecommunications sector restructuring and mobilize private capital and management. The International Bank for Reconstruction and Development (IBRD) gives policy and regulatory advice. To mobilise private capital and management it can provide long-term loans at market rates, with a government guarantee, as well as investment guarantees. Over the past 5 years, the World Bank has provided advisory services and assistance, including major sectoral adjustment loan operations to more than 10 Latin American governments, on how to manage telecommunications sector reform. In the years to come, IBRD is well positioned to provide advice and support to governments in tackling the regulatory challenges in a converging liberalised market environment. Increased Private Sector Support The significance of assisting the enhancement of the policy and legal framework to create an investment friendly environment is recognised by the World Bank Group. In the context of a dramatically growing share of private capital, and considering the fact that not all emerging economies benefit from the inflow of private capital to the same extent, there is an increased importance for the International Finance Corporation (IFC). The IFC can help jump-start conditions for the mobilisation of private resource by means of equity and debt investments, underwriting and syndication, structuring and advisory services as well as guarantees. Similarly of increased significance, the Bank Group’s investment guarantee arm MIGA furnishes insurance to private investors against political risks and gives corresponding advisory services. These instruments allow the Bank Group to assist countries in obtaining access to international capital markets. Information Infrastructure for Development To encourage the development of information infrastructure for development by means of funding innovative ideas and concepts, the Information for Development Program (infoDev) was created in the spirit of partnerships between the public and private sector. The program is a consortium of bilateral government donors, private corporations and the World Bank. Its primary objectives include the creation of a market friendly environment, reduction of poverty and exclusion of low-income countries or social groups, improving education and health sector performance as well as increasing government efficiency and accountability. InfoDev has been designed to be a forum for exchanging ideas and sharing best practices that support ongoing initiatives and create opportunities for development. Current work program proposals include the Jamaica Partnership for Technology in Basic Education and a one-year program to establish an Internet training facility and enhance information access in Mexico. Conclusion Telecommunications in Latin American economies will largely be fostered by policy choices of governments and technological progress in the context of global liberalisation of telecommunications. An important step in this direction was taken early this year with the commitment of 18 Latin American and Caribbean governments to liberalise their basic telecommunications services under the General Agreement on Trade in Services (GATS).
