Challenges of Telecom Regulation and Competition in Sri Lanka

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

10. 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

11. 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

12. 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)

13. 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?

14. 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

15. 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

16. 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

17. 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

18. 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

19. 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

20. 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?

21. 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

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