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Challenges of Telecom Regulation and Competition in Sri Lanka

This article explores the principles of competition in telecom regulation, drawing from experience in Sri Lanka and other countries. It discusses the necessity for competition and regulation in economic reform, the lessons learned from telecom reforms, and the challenges facing the telecom sector. It also examines the sufficiency of competition law in meeting these challenges, considering the complexity of telecom access issues and the resources and institutional capacity required.

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Challenges of Telecom Regulation and Competition in Sri Lanka

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  1. Embedding competition principles in telecom regulation Rohan Samarajiva Samarajiva@lirne.net Malathy Knight-John malathy@ips.lk CUTS, August, 2005

  2. Outline • Why reform for competition • Key aspects of reform process • Drawing from experience in telecom and gas reforms in Sri Lanka • Can competition law keep up with the challenges facing telecom sectors? • Towards a new framework for competition in telecom • Drawing from Sri Lanka and selected country experience

  3. Economic reform: the necessity for competition & regulation • Infrastructure industries characterized by • Essential facilities • Economies of scale and scope • First-comer advantages • Therefore, reform has to include • Introduction of competition • Organizational reform of incumbent • Introduction of explicit regulatory regime • Many developing country reforms neglect one or two aspects, e.g., • Sri Lanka’s sector reforms were seen as by-products of privatization transactions & paid inadequate attention to sector performance • Telecom & household gas sectors as exemplars

  4. Post-reform Pre-reform Telecom LP Gas

  5. “Connectivity” aspect of post-reform sector performance • Telecom (sector reform + privatization) • 1991 corporatization & creation of regulator had no significant effect • 1996-98 reforms (competition/ interconnection) had dramatic effects • Household gas (privatization; no overall reform process) • Privatization without competition does not result in significant growth • Other benefits (e.g., mandated investment) • Data does not capture effects of duopoly from 2001 & competition from 2003

  6. Lessons from telecom reforms, 1991-2003 • Competition is key • Sri Lanka became a top 10 fixed-telephony growth market after competition introduced • Allowing four mobile operators into a small market was radical in 1994, but has paid off, with 23.9% of households now having some form of telephone access • 115,000+ mobiles were in operation in North & East within months of ceasefire • Monopolies are harmful • Uncertainty created by 5-year international exclusivity harmed the entire sector, including the beneficiary

  7. Lessons from telecom reforms, 1991-2003 • But regulation is necessary for competition and growth • Rapid growth in mobile assisted by implementation of better fixed-mobile interconnection in 1999 & ending of international exclusivity in 2003 • Fixed sector growth stunted by refusal of incumbent to accept, & the government to enforce, the 1999 fixed-fixed interconnection • Failure was partly due to ambiguous exclusivity granted at privatization

  8. Mobile Fixed Competition Introduced End of International Exclusivity Fixed-Mobile Interconnection Improved Fixed Partial Privatization

  9. Competition wherever possible; regulation where necessary • Principle recognizes that markets (decentralized decision making) are • Superior to planning in complex, dynamic systems • Better than planning in fostering/responding to innovation • Capable of yielding better performance • Also recognizes imperfection of infrastructure markets by allowing for regulation

  10. Infrastructure reforms in 2002-04 • Regulation to ensure “level playing field” for investors and to protect consumers • Safeguards to prevent extension of market power into competitive markets • Structural vs behavioral • Control market power in monopoly markets • Asymmetric regulation • Pragmatic approach; 2nd & 3rd best solutions better than none

  11. Challenges to competition in telecom sectors • Incumbent advantages (control over essential facilities, vertical economies, control over network standards) • Challenge for regulators: • Differentiate “natural” advantages of economies of scale and scope from anti-competitive practices • Implement asymmetric regulation without unfairly handicapping incumbents • Access to the Internet (broadband services) • Slow progress in local loop unbundling • Social “legacies” (cross-subsidization: rural/urban; USOs)

  12. Is competition law sufficient to meet telecom challenges • Drawing from New Zealand experience • Complexity of telecom access issues and sophistication of solutions required (e.g. interconnection disputes) exceed boundaries of “general purpose” competition law • Costly and lengthy litigation increased competitors’ market entry costs • Replicability of “model” in developing countries?

  13. Is competition law sufficient to meet telecom challenges? • Drawing from Sri Lanka example • Resources are serious problem • Funding from Treasury • Compromises independence & does not allow for systematic development of capacity • Sale of forfeited goods • Fines • Low yields, so in effect reliance on treasury • Also, reliance on fines creates improper incentives

  14. Is competition law sufficient to meet telecom challenges? • Institutional capacity • Low remuneration  weak “analytical” capacity; low levels of professionalism • No independence • All members appointed by single subject Minister • Turnover similar to a government corporation • Contrast with Public Utilities Commission, with Constitutional Council appointment and staggered terms

  15. Towards a new framework for competition in telecom: issues • Sector-specific technical expertise vs. cross-sector flexibility • Technical “tunnel” vision vs. broader allocative efficiency/social welfare • Regulatory capture

  16. Towards a new framework for competition in telecom: Institutional mechanisms • Concurrent jurisdiction (e.g., South Africa): clear demarcation of role of competition authority and sector regulator • Is this affordable? • Implications for regulatory risk and effects on investment • Competition principles embedded in sector licences (e.g., Hong Kong) • Multi-sector regulation exploiting scale and scope economies in institutional design (e.g., Public Utility Commission of Sri Lanka) • Choice may depend on country/market size

  17. Example: Public Utilities Commission Act, 35 of 2002 • Contains the strongest competition law provisions in Sri Lanka • Applies to any industry that is brought under the PUCSL by inclusion in schedule by Parliament • Electricity Reform Act 34 of 2002 • Petroleum Sector Reform Bill? • Also addresses independence and capacity problems of Competition Authority

  18. Independence • Commission members appointed for staggered terms with concurrence of Constitutional Council • Specified procedures for removal by Parliament • Funded by industry levies, not consolidated fund • Policy directions may be given only through Cabinet

  19. Capacity • Funding through industry levies allows for outsourcing and adequate compensation packages • Potential exists for an innovative organization that breaks from dysfunctional government models • Will the potential be realized?

  20. Competition-friendly reforms in infrastructure industries • Clear vision with broad buy-in • Duration of reforms does not overlap with term of government • Capacity • International best practice blended with knowledge of local circumstances • Beyond the big bang • Capacity & commitment in ex-ante and ex-post regulatory agencies

  21. Contacts • Rohan Samarajiva • www.lirneasia.net • samarajiva@lirne.net • Malathy Knight-John • www.ips.lk • malathy@ips.lk

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