Introduction to

Telecom Reform and

Liberalization

Policy and Regulatory Tools

Stefaan G. Verhulst, Markle Foundation
August 2003
 OUTLINE
• Developments and Rationales behind
Reform
• Promises and Expectations of Reform
• Tools and Trajectories of Reform
• Models and Comparisons
 The historical approach to
telecommunication service provision
• The PTT (Post, Telephone and Telegraph Administration) was
granted a monopoly on the provision of telecommunication
infrastructure and services since late 19th century.
• Basic model world-wide = monopoly on equipment and on basic
network and service provision (public monopoly in Europe vs
private in the US)
• The natural monopoly doctrine: the industry enjoys large fixed costs
whose duplication was neither profitable for private investors nor
socially desirable. Telecommunications was one of the societal
benefits that economic development allowed.
• European PTTs became large and powerful employers, often
capable to subsidise other social programmes.
 (…cont’d)

• PTTs had multiple roles as policy-maker, regulators,

and operators.
• During this time, experiences in telecommunication
performance varied among countries (e.g. France vs
Belgium, Greece)
 Main pressures for change
(since late 1970s)
• Radical developments in the electronics/computer industry
and digital technology lowered the costs for certain types of
infrastructure, exposed the inefficiencies of PTT monopolies, and
offered opportunities for market entry.
• Increasing technological convergence between previously
separated industries (consumer electronics industry,
telecommunications, and media publishing) created new types of
value-added services.
• Internationalisation of business urged national carriers to
compete in attracting customers wishing to establish
multinational private networks.
• In Europe, concerns were raised over creating a single
European market for equipment and services able to compete
against the US and Japanese rivals.
 Major steps of reform
Strategies for the restructuring of
markets in the 1980s
(as identified by Noam and Kramer, 1994)
• Market structure Strategies
– Liberalisation
– De and re-regulation
– Divestiture (e.g. AT&T)
– Consolidation (for capturing economies of scale and scope,
e.g. through mergers and acquisitions)
• Ownership strategies
– Corporatisation (loosens direct government control on the
PTT)
– Privatisation
 … (cont’d)

• International Strategies
– Expansion into new international markets
– Alliances

• Competitiveness Strategies
– Industrial policy considerations
– Vertical integration (often with equipment manufacturers)
 Promises and Expectations
behind Telecom Reform and
“Liberalization”
• Faster Growth and Increased Investment
• Better and Newer/Alternative Services
• New Service Providers
• Lower Costs (and lower prices)
• International Trade in Telecommunications
Services
Regulatory Intervention
(behavioral and structural)
 Major reform
trajectories and tools

}
• Privatization and Licensing of
competitive operators
• Interconnection and unbundling
• Price regulation in non-
competitive market segments
• Introduction of transparent Independent
Competition regulation Regulator (NRA)
• Universal Service and funding of
social goals
• Removal of international trade
barriers
 Time patterns of reform
• Countries that liberalize their markets often follow
a certain timeline
– Liberalization of equipment;
– Liberalization of value-added services;
– Liberalization of mobile and satellite services;
– Liberalization of basic service (voice, data);
– Liberalization of infrastructure networks;
• General trend to establish independent regulatory
agencies
 Institutions and Roles

Policy: Government Independence

Accountability
Regulation: NRA Funding
Multi-sectoral

Operation: PTO
 Licensing
Telecom as an Essential Service/Finite Resource
• Privatization or Commercialization
• Provision of Regulatory Certainty and Flexibility (defines
rights and obligations, e.g. access)
• Regulating Market Structure
• Balancing Competition and Consumer Protection
• Generating Government Revenues
Types: individual operator licenses; general authorization;
open entry
Critical: Transparency of Process and Criteria (comparative
selection vs auctioning)
 Interconnection
“inter-operator access” (gatekeeper issues)
• Procedural Issues (negotiation, dispute resolution
and terms – non-discriminatory, fair and
transparent - WTO)
• Commercial and Consumer Issues (charges,
privacy, and resale)
• Technical and Operational Issues (Standards,
Quality, Sharing and Access to Critical Operation
Support Systems)
 Price Regulation
Rationale
• Revenue and Investment Objectives
• Efficiency: Productivity and Cost Objectives
• Social and Equity Objectives
Methods
Price Cap Regulation vs Rate of Return Regulation
and Discretionary Pricing
Concerns
International Accounting vs VoIP
 Competition Regulation
• Imperfect competition = market failure
• Sector Specific vs Competition Law
• Basics (determining the playing field):
– Market Definition
– Barriers to Entry
– Market Power and Dominance
– Essential Facilities
• Remedies (licensing, fines and damages, re-
structuring)
 Universal Service
• Universal Service vs Access
• Principles
– Availability and Accessibility
– Affordability
– Quality
• Obligations and Funding
– Licensing arrangements
– Cross and other Subsidies - Universality Funds
• Key: Universality as a Moving Target
 Emerging models of reform
• Model 1: privatization with full competition (New
Zealand, Chile, Malaysia)
– Benefits: initially increased efficiency
– Challenges: continued dominance
• Model 2: privatization with phased-in competition
and regulation (EU, Japan, Hong Kong, Australia,
Korea, Argentina, Brazil)
– Benefits: increased efficiency
– Challenges: effective regulation, limited impact of
privatization
 Emerging models ...
• Model 3: liberalization without privatization
(Colombia, India)
– Benefits: increased efficiency
– Challenges: limited access to capital markets
• Model 4: private sector participation without
privatization or liberalization (China, Saudi
Arabia)
– Benefits: access to capital & expertise
– Challenges: continued strong state control
 EU v. US approach
EU US
Tends to emphasize Tends to emphasize
Competition dynamic competition static competition
Model (antitrust approach) (regulatory approach)

Narrow definition Broader definition

Universal
of services supported of services supported
Service from industry funds from industry funds

Differentiated but
More coordinated and
Convergence horizontal regulation “porous” legal and
regulatory framework