Telecom for improving investment climate & ICT use

1. Telecom for improving investment climate & ICT use Rohan Samarajiva, Public Interest Program Unit, Ministry of Economic Reform, Science & Technology Samarajiva@lirne.net; +94 1 247 8733

2. Purpose of presentation • Reform of telecom is a necessary condition for investment overall • Creating conditions for private investment in telecom • Market entry • Independent & effective regulation • Examples from Sri Lanka throughout

3. Sri Lanka’s telecom sector after 12 years of reforms • Multiple operators (70+) • 3 national fixed (no waiters in urban areas) • 4 national mobile (overtook fixed; real price declined) • 5+ facilities-based data • 30 external gateway (~66% decrease in price) • 20+ non-facilities based data • Fixed teledensity < 1 in 1991  almost 5 in 2003; Mobile ~0.01 in 1991  5 < in 2003 • Telecom & banking are fastest growing sectors in economy in 2003 (~16%) • Telecom no longer a barrier to investment

4. Telecom as a necessary condition for increased investment • Two solutions • Improve service only in enclave • Improve sector performance everywhere • Sri Lanka tried the enclave solution in 1980s • Supplementing exchange & outside plant in Katunayake EPZ • Giving priority to GCEC factories (investors) • Poor results including ridiculous outcome of banning automatic rediallers

5. Investment in telecom sector overall is key . . . • What we want is • Adequate supply of services • Lower prices • Higher quality • More choice • How do we get it? • Not another reform of the failed government monopoly • Not regulation, per se • More investment

6. Private investment to improve telecom • Telecom is the infrastructure with the most dynamic industry structures and technologies • Integrated government monopolies lack nimbleness to play • No multilateral/bilateral assistance for unreformed monopolies • Public investments better used elsewhere

7. Government action to attract private investment in telecom • Greater private investment depends on positive answers to 2 questions • Are the returns adequate? (market risk) • Are safeguards against administrative expropriation adequate? (regulatory risk) • What can government do? • Let investors look after market risk: no market-position guarantees • Reduce regulatory risk

8. Government actions: Market entry & privatization • Minimize barriers to entry; SL policy is • License only where scarce resources are involved • Otherwise authorizations • Examples • External gateway operator licenses • 30 given since March 2003 • No discretion; no numerical limits

9. Entry conditions compared

10. Results . . . • From unstable monopoly to open entry . . . • From SLR 75 a minute to 20-25 . . . • Telecom no longer seen as barrier to BPO investments

11. Fixed telephony investments in Sri Lanka, 1992-2002 Incumbent Partially Privatized; Foreign Management; Competition Incumbent Government Owned; No Competition

12. Implications for the exchequer • Before the reforms, telecom was an easy but small source of government revenue • Very low rates for domestic (<40% revenues); high rates on international outgoing and termination (60<% revenues) • Periodic levies • After the reforms, it is an easy, reliable and LARGER source of government revenue • ~20% tax (VAT; BTT earlier); reliable • On a user base that has increased seven fold • Equity sales; licensing; spectrum fees; contributions to Vishva Grama Fund (for rural rollout) • Dividends from shareholding

13. Key reform events • 1989-1994 • Licensing of 15+ facilities-based operators, including Incumbent which was changed to corporation • 1996 • Licensing of two fixed competitors (USD 120 m) • 1997 • 35% sale of Incumbent to NTT of Japan for USD 225 million with 5-year management agreement

14. Key reform events • 1998 • Active regulation starts • First step of 5 year rate rebalancing • Satellite gateways liberalized • 1999 • Incumbent found to be in violation of license condition and pays consumers US$ 1 million • First public hearing conducted

15. Key reform events • 2002 • Government sells 12.5% of Incumbent’s equity, bringing government ownership to <50% • 2003 • 30+ External Gateway Licenses issued • New Interconnection Rules gazetted • Implementation ongoing • Already a commitment of USD 90 million additional investment

16. Government actions: Regulation • Reduce regulatory risk • Poor countries are poor because • Government does not work well  regulatory risk is high  investments are low/skewed  infrastructure is inadequate  economy is hobbled • Solution: independent and effective regulatory agency

17. Characteristics of effective regulation • No interference by government/incumbent • Constrained discretion • Professional and competent staff • Transparent participatory processes • Expeditious decision making • Efforts to reduce adversarial modes; increase buy-in • Doing a few things well

18. Independence of regulatory agency • Information & Communication Commission that will replace TRC • Members appointed with concurrence of Constitutional Council • Accountable to/removable by Parliament • Not reporting to Minister for Telecom

19. Constrained discretion • Rate rebalancing in 1998-2003 governed by legal agreement that set revenue requirements • Regulator decided specific tariffs that would yield promised revenues

20. Telecom regulation should focus on • Interconnection & anti-competitive issues • In Sri Lanka • New interconnection rules in March 2003 • Including access to undersea cable station • Implementation in process • Dominant position rules being framed • New legislation will remove tariff regulation from non-dominant operators • Anti-competitive practices proceedings soon

21. Regulation should focus on • Efficient management of scarce resources (spectrum, rights of way and numbers) • In Sri Lanka • Allocation & assignments made public • 1800 MHz, CDMA & WiFi consultations • First frequency auction in May 2003 • New legislation on rights of way including “final offer” arbitration • New numbering plan being implemented

22. . . . And get out of unnecessary areas • Most retail tariffs unregulated in new Act (except of dominant operators) • Equipment approvals power replaced by Mutual Recognition approach • Consumer issues to be covered by consumer contracts • Regulator intervenes only when contract provisions exhausted

23. SAARC countries 1995-2001 telecom performance