Home Latin America III 1997 The WTO Agreement on Basic Telecommunications Services in the Latin American/Caribbean Region

The WTO Agreement on Basic Telecommunications Services in the Latin American/Caribbean Region

by david.nunes
Charles Loveridge Issue: Latin America III 1997
Article no.: 2
Topic: The WTO Agreement on Basic Telecommunications Services in the Latin American/Caribbean Region
Author: Charles Loveridge
Title: Senior Fellow
Organisation: Center for Strategic and International Studies, USA
PDF size: 36KB

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Article abstract

While the WTG Agreement is a giant step forward, much work remains to be done to open up the telecommunications markets of the region to competition. Countries that want to compete economically must upgrade their telecommunications infrastructure in order to attract the capital they need. Making both competition and regulation of telecommunications companies a reality, though difficult, is necessary for the future.

Full Article

On February 15, 1997, 69 countries representing 95% of the world’s telecommunications traffic reached agreement on the basic principles that shall govern trade in telecommunications services. Known as the Agreement on Basic Telecommunications Services, it was negotiated over a 3 year period under the auspices of the World Trade Organisation (WTO). According to WTO Director General, Renato Ruggiero, the Agreement “promotes liberalisation, and it enhances certainty, security, and predictability through a clear set of rules”. All experts agree that the Agreement will expand trade in telecommunications services and cut prices to consumers. Ruggiero predicted that it could lead to an increase in global income of some US$1 trillion dollars over the next decade or so – an increase of 4% of the world GDP. US trade representative Charlene Barshefsky predicted that the US $600 billion a year telecommunications industry would “double or even triple over the next 10 years”. Denis Gilhooly, Vice President of Business Development at Teledesic, has calculated that the Agreement would cause international telephone charges to be reduced by 50-80% from US$1 per minute to US$0.20 per minute, an enormous saving for telephone users. The Development of Telecommunications Over the past few decades, advances in telecommunications and computer technology have made it possible to move ever larger quantities of information over greater distances and at constantly declining costs. In addition to creating whole new industries, this ability to communicate instantaneously and cheaply with any point on the globe has made it possible for companies to take increasing advantage of the factors of production wherever they may be found in abundance. The consequence of this has been the creation of one inter-linked global economy, not the series of poorly integrated national economies that had been the norm until after World War II. However, if many countries have a certain factor of production in abundance, for example labour at attractive wages, then other factors will go into the decision as to where to open a factory or business. Foremost among the factors that entrepreneurs look at when making investment decisions is the availability of advanced telecommunications networks. For a country to become an attractive site for investment, it must offer modern telecommunications capabilities to potential investors. Unfortunately, the number of countries in the Latin American and Caribbean region that have such infrastructures is limited. Building a Modern Telecommunications Infrastructure The Agreement could not have come at a better time for Latin America and the Caribbean, as nations in the region struggle to modernise their telecommunications infrastructures. Access to telecommunications services in the Americas varies considerably. The US and Canada have 85% of the telephone lines in the region, despite having only 51% of the population. The average telephone density in Latin America and the Caribbean is 10 lines per 100 inhabitants, compared to 59 lines per 100 inhabitants for the rest of the continent. Besides Canada and the US, only seven countries in the region have more than 20 lines per 100 inhabitants: Antigua and Barbuda, the Bahamas, Barbados, Dominica, Grenada, St Kitts, and Nevis. Together these countries comprise only 0.44% of the population of the region. On the other end of the scale, 12 countries, with a total population of approximately 360 million inhabitants have an average telephone density of less than 10 lines per 100 inhabitants. Building Networks in the Americas At an average cost of US$1,500 to install a new telephone line, it would require an investment ofUS$137 billion to bring the regional average up to 20 lines per 100 inhabitants. By opening the sector up to competition, countries can begin to attract the private investment capital they need. The WTO Agreement will speed up this process. Since 1989, international telecommunications companies have paid considerable sums to acquire the former government telecommunications companies in Argentina, Bolivia, Chile, the Dominican Republic, Mexico, Panama, Peru and Venezuela. Most recently and most dramatically, a consortium led by the US-based Bell South paid US$2.45 billion dollars just for the B-band cellular license for Sao Paulo in Brazil. How Will the Agreement Work? Primarily, the Agreement opens up national and international markets to foreign competition. For example, an analysis of the country offers also reveals that during the WTO negotiations, Chile, Colombia, the Dominican Republic, El Salvador, Guatemala, and Trinidad and Tobago have agreed to permit foreign ownership or control of all telecommunications and facilities by 1998; Peru by 1999; Argentina and Venezuela by 2000; Bolivia by 2001; and Grenada, Antigua and Barbuda, and Jamaica sometime after 2005. Brazil has agreed to 100% foreign ownership for non-public, satellite and cellular services after July 1999. Ecuador agreed to 100% for cellular only. Mexico agreed to 100% for cellular and 49% for all other services. Chile, the Dominican Republic, El Salvador, Guatemala, Mexico, and Trinidad and Tobago have agreed to open up international telecommunications services and facilities to competition by 1998; Peru by 1999; Argentina and Venezuela by 2000; Bolivia by 2001; Mexico by 2002; and Jamaica and Grenada after 2004. Brazil agreed to open all non-public domestic and international services for closed user groups not connected with the PSN. But most importantly, 54 countries have agreed to adopt a new set of regulatory principles that are designed to guarantee pro-competitive regulatory regimes. They include Antigua and Barbuda, Argentina, Chile, Colombia, the Dominican Republic, El Salvador, Grenada, Guatemala, Jamaica, Mexico, Peru, and Trinidad and Tobago. Brazil agreed to adopt the principles in the future; Bolivia and Venezuela agreed to adopt some of the principles. Regional Consensus for Competition The desire to create a new competitive environment in telecommunications in the Americas did not originate with the WTO. When the presidents of the nations of the Western Hemisphere gathered in 1994 at the Summit of the Americas, telecommunications was one of the subjects on their minds. The leaders called for increased private investment in the telecommunications sector and the creation of a regulatory environment conducive to fair competition. The three main recommendations were to: · adopt new telecommunications legislation in all countries of the Western Hemisphere as soon as possible and not later than 2005, allowing competition and authorising free entry into intra-country markets; · adopt new regulatory structures as soon as possible, and not later than 2005, in the telecommunications operator, and modifying existing regulatory frameworks to allow a smooth transition from current controlled traditional market mechanisms to open, competitive markets; · establish a regulatory framework capable of adjusting to technological change, to ensure the protection of intellectual property rights, privacy and security of information. The WTO Agreement provides this framework and moves forward the date for implementation from 2005 to 1998. Transition to Competition Governments are facing a problem. They do not have a magic wand that they can wave to instantly transform their telecommunications industries, entrenched government-owned monopolies for the most part, into competitive, consumer-oriented companies engaged in fair and open competition with each other. The transition to competition involves three key elements: privatisation, liberalisation and, perversely, regulation (lying along a continuum). At one end we have total government ownership of the basic telephone network; at the other, fair and open competition. At present, a slim majority of countries in the region are clustered near the monopoly end of the continuum. Of the 43 countries in the Americas south of the US, local telephone service in 17 countries is provided by companies that are wholly owned by the government. Five more countries spend on companies of mixed ownership but with a government majority. In eight countries, service is provided by companies that are partly, but not majority owned by governments. Thirteen countries depend on privately owned companies for their basic telecommunication services. Privatisation Privatisation is the first step and conceptually the simplest. The process is already underway. The sale of government-owned monopolies in Mexico, Chile, Argentina, Bolivia, Peru, Venezuela and Panama has shown that their investors are willing to pay a substantial price for the assets of a monopoly and to agree to invest extensively in developing the network when the conditions are right. Liberalisation However, privatisation does not automatically lead to competition. The trend in the Americas has been, in fact, to privatise the government monopoly while giving the new private-sector operator an exclusive right to provide local and, sometimes, long distance service for a number of years. Five of the countries mentioned (Argentina, Bolivia, Panama, Peru and Venezuela) have given buyers the right to be the exclusive providers of telecommunications services for some period of time, thus converting a public monopoly into a private one. The next step is to allow new service providers the legal opportunity to offer new services. In theory this is a fairly simple step but in practice it has generated considerable opposition from labour unions and political parties committed to maintaining the governments role in the provision of what are generally referred to as essential services. Regulation Privatising the state-owned monopoly and giving new service providers the legal right to compete is still unlikely to result in real competition. Competing against a company that has a national infrastructure and a percentage of the market is difficult. The dominant provider controls access to its customers and experience has shown an unwillingness to allow competitors to connect to its network on reasonable terms. It can also use its dominant market position to keep rates high in areas and services where it has no competition and use the proceeds to cross subsidise services where it does face competition. In order to enhance competition, countries need to create an independent regulatory authority capable of protecting new market entrants from the predatory practices of the dominant operator. Without such protection, a new service provider has little chance of competing successfully. At present, the regulatory situation in the region is mixed. Most of the countries in South America have, at least on paper, regulatory authorities with some degree of independence. In Central America, most of the companies are government owned and self-regulating (Mexico is a notable exception). In the Caribbean, regulatory authority is vested in one ministry or another in most of the countries; the Dominican Republic is the one country that is actively moving toward an independent regulatory authority. Making competition a reality will be difficult. Regulation of telecommunications companies is difficult. It requires a tradition of regulatory independence and even hardness that is often lacking in these countries. It also requires resources, both monetary and human, to make the process work. Conversations with regulators from several countries suggest that the biggest problems that they face are a lack of qualified personnel and high turnover of staff caused by low wages, a lack of technical competency to judge complaints from competitors, political interference, and the lack of a legal framework that makes regulation work. Competitive Environment While the WTO Agreement is a giant step forward, much work remains to be done to open up the telecommunications markets of the region to competition. Only two countries in the region can be said to be open to full competition – Chile and Mexico. Colombia and the Dominican Republic allow a degree of competition in basic services and several others are in a transition toward a competitive regime. That leaves 39 countries where the provision of local telephone services is primarily a monopoly. Only Peru (1999), Venezuela (2000), Bolivia (2001), Belize (2002), Panama (2003) and Ecuador (2003) have announced firm plans to open their local markets to competition. The Future The trend is clear. Each year more and more countries of the region are privatising their telecommunications companies and creating the conditions for competition. The first to take the leap was Chile. The next country to move decisively in this direction was Mexico. El Salvador, Nicaragua, Panama, Peru and Venezuela have already made considerable progress towards liberalisation and others are following suit. Conclusion The WTO Agreement will provide even greater impetus to this process. As noted earlier, the 69 countries that have become a party to the Agreement represent more than 95% of the world’s telecommunications traffic. Other nations that want to compete economically must upgrade their telecommunications infrastructure in order to attract the capital they need, and they will be forced to follow the lead of those countries that have already signed the Agreement.

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