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Mexico’s Meandering Telecommunications Sector

México: How to tap progress Ernesto M. Flores-Roux, PhD Centro de Investigación y Docencia Económicas , A.C. – CIDE Federal Reserve Bank of Dallas, Houston Branch Houston, Texas, November 2, 2012. Mexico’s Meandering Telecommunications Sector.

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Mexico’s Meandering Telecommunications Sector

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  1. México: How to tap progress Ernesto M. Flores-Roux, PhD Centro de Investigación y DocenciaEconómicas, A.C. – CIDE Federal Reserve Bank of Dallas, Houston Branch Houston, Texas, November 2, 2012 Mexico’s Meandering Telecommunications Sector

  2. According to the OECD, Mexico has experienced a welfare loss equivalent to 2.8% of GDP per year in the last 5 years, 1.8 p.p. of which are due to excessive pricing Welfarelossattributedto a dysfunctionaltelecom sector Percentage of GDP Loss in consumer surplus… … due to unrealized subscriptions … due to excessive pricing 5.0 4.3 4.2 4.2 2000-2004: 4.2 2005-2009: 2.8 3.7 3.7 3.4 2.4 2.2 1.0 Source: OECD. (2012) OECD Review of TelecommunicationsPolicy and Regulation in Mexico.

  3. The amount of overpricing is higher than all but two taxes and is equivalent to the gasoline subsidy Public sector income Billions of pesos (nominal) – 2011 Income tax (ISR) Value added tax (IVA) Pemex CFE Social contributions Special purpose tax (IEPS) Licensing Flat rate business tax (IETU) ISSSTE Import tax Cash deposits tax IMSS Telecom overpricing according to the OECD 162.0 Gasoline subsidy 166.0 Source: SHCP (2012); OECD (2012)

  4. If fixed telephony prices were similar to the OECD average, other basic staples’ prices could increase significantly with no impact on the inflation index Potential price increases with no effects on the INPC if fixed telephony were priced at OECD levels Percentage over current price INPC Fixed telephony weight: 1.51934 Overpricing according to the OECD: 94.9% Decrease potential: 0.77955 Eggs Pork Fruits Poultry Milk Tortillas Beef INPC weight 0.62302 0.69147 1.17588 1.31802 1.44288 1.58664 1.79145 Source: INEGI (2010, 2012); OECD (2012)

  5. If these prices were the consequence of a vibrant telecommunications sector, there would be a trade-off to be considered. But that is not the case. In the most comprehensive measure of the ICT sector, published by the WEF, Mexico has lost between 12 and 32 positions in the last 10 years Networked Readiness Index – NRI Ranking of Mexico Original sample of countries (2002) Overall ranking with an increasing sample size 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Source: WorldEconomicForum

  6. Penetration of basic services lags behind many countries Broadband penetration Fixed + Mobile, 2011 Average advertised speed in Mbps Mexico GDP per cápita (PPP) Source: OECD (2012)

  7. In mobile telephony in Latin America, Mexico lags behind every country except Cuba and Bolivia… Mobile penetration Mid 2012 Source: WorldEconomicForum (2011); OECD (2011)

  8. … and it is a market which is extremely concentrated Telcel’s market share Percentage -2.5% in 4 years 70.3% Source: WirelessIntelligence (2012); companyreports

  9. Penetration is very uneven among income groups… Penetration of ICTs in Mexican households Per income level (deciles), 2010 Fixed Mobile Computers Internet 41 64 26 19 Source: INEGI / ENIGH (2010) & ENDUTIH (2010)

  10. … and the gap is growing between the rich and the poor: the internal digital divide is growing very rapidly Growth of ICTs in Mexican households Per income level (deciles), 2010 Fixed Mobile Computers Internet Top 50% Bottom 50% -4.5 -7.5 9.8 3.9 3.6 0.6 10.2 0.7 x 0.6 x 2.5 x 5.8 x 14.6 Source: INEGI / ENIGH (2010) & ENDUTIH (2010)

  11. Schools are not well equipped… Penetration of Internet access in schools Percentage, late 2010 Finland: 100% South Korea: 100% USA: >95% Chile: 75% Source: CIDE (2010)

  12. … and penetration in businesses is almost a mystery: no reliable statistics exist Penetration of Internet in businesses Percentage, different years (as available) 10-49 employees 50-249 employees More than 249 employees South Korea Spain Canada (2007) Israel (2008) Mexico (2008) EU 27 Italy Greece Mexico (more than 10 employees): 51.6 Source: OECD (2011); ForMexico, from 20 to 49 employees

  13. The use of ICTs in government is also mediocre. In relative terms, it has gotten significantly worse in the last three years 2011 ranking Places gained (lost) in worldwide e-government rankings 52 72 36 16 55 40 62 25 51 3 Mexico Argentina Brazil China Chile Germany United Kingdom Colombia Panama Russia Source: UnitedNations. e-GovernmentSurveyReport, 2008 & 2011

  14. So what has gone wrong? • Lack of government interest • Not a national priority • Inadequate laws and regulations • Inadequate competition policy • Abuse of injunctions • Dominance of one player • Regulatory capture • No enforcement of laws and regulations This can all be translated into one big issue: Lack of institutions

  15. So what can be done? First and foremost, institutions need to be fixed • Overlapping of functions does not provide checks and balances and creates enormous stress in the system • The “double window” gives all players significant arbitrage opportunities • It also reduces accountability in public officers • If not done correctly, the proposed creation of the Secretaría de Comunicaciones will worsen the problem. This will determine, from the beginning, the possibility of changing the status quo • Policy making and regulation need to be “MECEly” divided (Mutually Exclusive, Completely Exhaustive) • Regulator must be able to fine players and set prices (either retail or wholesale) and the policymaker (SCT) ought to have no saying in the matter Eliminate the “double window”

  16. Do “surgical work” to the different laws that rule the sector • Fix the institutions – eliminate the “double window” • Allow foreign direct investment with no restrictions • Eliminate all bottlenecks and red tape contained in the law (enormous discretionary power to SCT and Cofetel) • Allow Cofetel to determine “dominance”: currently, only Cofeco can do that, creating a “terceraventanilla”

  17. Change basic regulations • Interconnection (prices should be set by the regulator, not negotiated between/among the players) • Transport • Unbundling • Resale • MVNO • If all else fails, create alternative networks (“a la Telebras”) • Develop (and enforce) asymmetric regulation for dominant players • No discrimination /price differentiation • Interconnection rates • Eliminate all bottlenecks and red tape created by regulation Fix wholesale markets Develop dominant player regulation Eliminate red tape

  18. Comply, enforce, and empower • Guarantee that concession contracts are fully complied with: • For example, Telmex continuously violates its concession contract, with no consequences whatsoever: • Bundling of services • Actions that can be considered dumping • Not allowing interconnection • Rural investment • … • This is NOT restricted to Telmex, by any means: other players constantly abuse the system • Information – availability + publicity • Citizen channels (“customer service”) Enforce what is already available Empower users

  19. México: How to tap progress Ernesto M. Flores-Roux, PhD Centro de Investigación y DocenciaEconómicas, A.C. – CIDE Federal Reserve Bank of Dallas, Houston Branch Houston, Texas, November 2, 2012 Mexico’s Meandering Telecommunications Sector ernesto.flores@cide.edu rnst.flrs@gmail.com

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