Process and impact of market liberalisation: Worldwide trends

1. Process and impact of market liberalisation: Worldwide trends Dr Tim Kelly, ITU Tuesday Session 1 CTO Senior management seminar: Telecoms restructuring and business change Malta, 17-21 May, 1999 The views expressed in this paper are those of the author and do not necessarily reflect the opinions of the ITU or its membership. Dr Kelly can be contacted at Tim.Kelly@itu.int.

2. Agenda • Market liberalisation: Trends • Why? Where? When? • How fast? • WTO market liberalisation process • Alternatives to competition/privatisation • Build/Transfer arrangements • Impact on tariff rebalancing • Universal service concerns • Does competition bring the expected benefits?

3. Degree of competition in basic services, 1998, by region Monopoly 100% Competition 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Africa Americas Arab Asia- Europe States Pacific Source: ITU Telecommunication Regulatory Database.

4. Status of competition by market segment, worldwide, 1998 Long distance International Local Monopoly Monopoly Monopoly 47% 56% 54% Competition Competition Competition 53% 44% 46% Source: ITU Telecommunication Regulatory Database.

5. Degree of competition in mobile services, by region, 1998 Monopoly Competition 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Africa Americas Arab States Asia-Pacific Europe Source: ITU Telecommunication Regulatory Database.

6. Why introduce competition into the Sector? • To introduce fresh investment and/or foreign investment into the Sector • Existing network may be ageing or poorly maintained • Existing operator may be debt-ridden or financially constrained • To introduce innovation, price competition and new management techniques • To create new business opportunities for local entrepreneurs and other suppliers • To create more choice for consumers • To improve level of teledensity and pace of network roll-out

7. Competitive markets tend to grow faster than monopolistic ones Source: ITU “World Telecom Development Report 1998: Universal Access”

8. Growth in international traffic per line, in emerging markets (1990=100) 200 175 Competitive markets 150 125 Non-competitive markets 100 75 50 25 0 1990 1991 1992 1993 1994 1995 Source: ITU World Telecommunication Development Report, 1996/97.

9. Different approaches to market liberalisation • Introduce competition first in mobile and value-added, and only later in basic services • e.g., South Africa has had mobile competition since 1994 (Vodacom and MTN) but Telkom SA has an exclusivity until 2003/4 over basic service. • Introduce a duopoly for a period followed by more open competition • e.g., UK introduced duopoly (BT/Mercury) in 1982 but went for full competition in domestic services in 1991 and in international service in 1996. • Go for “big bang” approach to market liberalisation • e.g., SwissCom had full monopoly in Switzerland until 1998; now open competition.

10. From duopoly to competition ... Source: ITU “World Telecom Development Report 1998: Universal Access”

11. Trade in telecoms: The WTO process • Dual role of telecommunications • As a facilitator of trade in other sectors (GATS) • As a directly traded product and service (BTA) • How can telecom services be traded? Modes of delivery • Cross-border (e.g., international calls) • Commercial presence (e.g., Foreign Direct Investment) • Consumption abroad (e.g., calling cards) • Movement of staff (e.g., consultancy services) • Total value of telecoms trade around US$120 bn in 1998 (principally equipment)

12. WTO timetable • 1986-1993: Uruguay Round • 15 April 1994: Marrakech Treaty (GATS) • 1994 - 1997: Group on Basic Telecommunications (GBT) • April 30 1996: “Standstill” • Feb 15 1997: Basic Telecommunications Agreement (BTA) • April 1997: Information Technology Agreement (ITA) • 5 February 1998: Implementation of BTA • November 1999: New round launched in Seattle?

13. General Agreement on Trade in Services (GATS) principles • Most-favoured nation (MFN), Article II • Transparency, Article III • Domestic regulation, Article VI: • qualification requirements and procedures • technical standards • licensing requirements • Monopolies and exclusive service supply (Article VIII) • Market access (Article XVI) • National Treatment (Article XVII)

14. Countries permitting competition in basic telecoms: 1990 1995 1998 Japan United Kingdom United States Australia Canada Chile Finland Japan Korea (Rep.) New Zealand Philippines Sweden United Kingdom United States Australia Austria Belgium Canada Chile China Denmark El Salvador Finland France Germany Ghana Hongkong SAR Israel Italy Ireland (Dec 98) Japan Korea (Rep.) Mexico New Zealand Netherlands Norway Philippines Russia Spain (Dec 98) Sweden Switzerland Uganda UK USA plus others ....

15. Percentage of outgoing international traffic open to competition Mono- poly Compe- 85% 74% tition 46% 35% Number of countries permitting more than one operator for international telephony 4 14 29 48 1990 1995 1998 2005 Note: Analysis is based on WTO Basic Telecommunications Commitments and thus presents a minimum level of traffic likely to be open to competitive service provision. Source: ITU, WTO.

16. Level of competition in international services in WTO basic telecoms agreement Monopoly Competition Source: ITU Telecommunication Regulatory Database.

17. African countries making GATS commitments to liberalisation • Côte d’Ivoire • Full competition by 2005 • Ghana • Duopoly for five years, then review • Mauritius • Competition by 2004 • Senegal • Competition some time between 2003-2006 • South Africa • Competition by 2003 • Uganda • Duopoly, 1998-2003; thereafter review

18. Alternatives to introduction of competition • Liberalisation of sectors other than basic telecoms • mobile communications • public payphones • Internet Service Providers • Award of franchises for different regions • “comparative” or “peer” competition, but not in same geographic area (e.g., Indonesia) • Award of build/transfer arrangements • Build Operate Transfer (BOT), Build Transfer Operate (BTO), Build Own Operate Transfer (BOOT) etc (e.g., Thailand)

19. Examples of strategic foreign investors in mobile, SADC

20. 7 7 Post- Pre- Build / 6 Build / 6 Transfer Transfer 5 5 Tele- 4 4 density 3 3 2 2 1 1 - 0 1990 1991 1992 1993 1994 1995 1996 Private sector participation through “Build/Transfer” • Thailand • Two build/transfer agreements were signed between TOT (Incumbent) and: • Telecom Asia (92) for 2.6 million lines • TT&T (93) for 1.5 million lines • to be completed by end-1996 Contractors TOT Source: ITU “World Telecommunication Development Report 1998: Universal Access”

21. Regional franchises (KSOs): Indonesia

22. Impact of competition on tariff reform • Historically, tariff structures have used cross-subsidy to fund low-priced connection, line rental and local call services from high-priced long-distance and international calls • Competitors will target those market segments where potential returns are greatest • Technology is tending to reduce the distance and duration element of tariff structures • Competition will hasten trends towards cost-oriented tariffs • Interconnection becomes critical to market evolution • Should regulator mandate terms for interconnection or leave it to the market?

23. Tariff rebalancing trends, in US$ Average of 39 major economies 12 10 8 6 4 300 minutes, local calls 3 mins Int'l call to US 2 Monthly line rental 0 1990 1991 1992 1993 1994 1995 1996 1997 Source: ITU World Telecommunication Indicators Database.

24. Monthly residential subscription, in US$: Selected countries plus World average Thailand $3.19 $3.43 Russia Turkey $4.12 Venezuela $4.16 India $5.15 Malaysia $7.11 Indonesia $7.22 Philippines $8.53 $8.91 Hongkong Brazil $8.94 Average $9.39 Mexico $9.75 Source: ITU World Telecommunication Indicators Database. S. Africa $12.05 Argentina $12.83

25. … lead to faster growth rates Higher monthly subscription charges ... Monthly residential subscription charges, US$ $10 Uruguay Malaysia $8 Hungary $6 Percentage of households with $4 telephone Morocco 70 $2 Malaysia 60 Hungary $- Uruguay 50 1990 1991 1992 1993 1994 1995 1996 40 30 Morocco 20 10 0 Source: ITU World Telecommunication Development Report, 1998: Universal Access. 1990 1991 1992 1993 1994 1995 1996

26. As competitors gain market share ... Long distance prices come down ... Source: ITU Asia-Pacific Telecommunication Indicators, 1997.

27. Universal service: Fears and responses • Competitors will only invest in most profitable areas (“cherrypicking”) and will avoid rural areas • Use license obligations to ensure that a prescribed minimum of investment reaches target • Competitors will put incumbent operator out of business • Incumbents have generally done better once competition is introduced • Competition will mean super-serving existing users not reaching new users • Teledensity grows faster under competition • Competition means foreign ownership • Liberalisation can create local entrepreneurs (e.g., EcoNet in Zimbabwe, private telecentres in Senegal)

28. Teledensity in Philippines (competitive) and Pakistan (monopoly) 3 2.5 Introduction of competition in Philippines 2 1.5 Philippines 1 Pakistan 0.5 0 1989 1990 1991 1992 1993 1994 1995 1996 1997

29. The benefits of liberalising the market for privately-operated payphones • Payphones can be used to extend access to under-served regions • Privately-operated payphones can form basis for teleshops, telecentres • In Senegal, operators of private telecentres receive discount on price of calls • Telecentres in Senegal employ more people than SONATEL Source: ITU World Telecom Indicators Database.

30. Positive impact of competition on Telstra (Australia) 14 2.0 Revenue 12 Profit 1.5 10 Revenue (US$bn) 8 Profits (US$ bn) 1.0 6 4 0.5 2 - - 1990 1992 1994 1996

31. Conclusions: Getting the recipe right • Identify objectives of introducing competition • What are the measures of success? • What are the concerns of incumbent, unions, consumers? • Define a long-term market strategy • Sequencing of competition in different market sectors • Timing of competition vis-a-vis privatisation • Establish licensing procedure and regulator • Address interconnection issues • Interconnection will make or break competition • Set out strategy for achieving Universal Access / Universal Service