Closing the market Efficiency Gap-Regulation and Competition

As I mentioned earlier closing the Market Efficiency Gap demands effective regulation and competition. In my view there is no point in utilizing public funds or USFs to take telecommunications to market segments that operators would willingly serve if they were facilitated through effective regulation and forced to as a result of healthy competition. This is one area where developing countries with overall institutional (implementation) weakness may fall short.

This makes it all the more important that they focus on putting in place sound laws and regulation modeled on international best practices but adapted to local context. This would ensures inter alia a level playing field  which precludes vested interests from rent seeking behaviour that is detrimental to the economy as a whole.

As an observer of worldwide developments in the area of telecom regulation I would like to draw the attention of readers to to some recent  news items:

The first is about investigation of several telecom giants for suspected abuse of dominance by the competition wing of the European Commission.  This can be read at:

http://www.theregister.co.uk/2013/07/11/european_commission_inspects_telcos_over_alleged_violation_of_competition_rules/

The second is about the likely  mandating of a reduction in access charges for fixed line grid by the Italian firm Telecom Italia SpA by the Communications Regulator of Italy. This article also speaks about the general trend towards reduction in network access charges (both fixed line and mobile) across Europe as a result of conscious efforts of regulators to enhance penetration.This is available at:  http://www.businessweek.com/news/2013-07-10/telecom-italia-is-said-to-face-about-6-percent-cut-in-grid-access-fees.

The third is about a  more liberalised M&A regime in Europe consistent with market conditions.  This includes a softening of attitude towards active infrastructure sharing. Ultimately increasing penetration is also about ensuring the financial health of the telecom opertaors. This can be viewed at http://www.mobileworldlive.com/fours-a-crowd.

An article  from the Indian Express dated 12.7.13 about present regulations relating to M&A in India may also be of interest to readers. This may be viewed at http://www.indianexpress.com/news/permit-spectrum-trade-m-as-will-follow-vodafone/1140801/

The Market Efficiency Gap

As I have mentioned earlier in my post at http://ictsforall.blogspot.in/search/label/Universal%20Service, Universal Access (UA)/ Universal Service (US) as obligations or policy instruments should ideally come into play when  in spite of effective regulation, liberalization and competition being in place,  the still market fails to serve certain areas or sections of population. The latter is known as the  Actual Access Gap and may arise on account of geographical or socio-economic reasons etc. The former are instruments to close what is known as the Market Efficiency Gap.

Source: WDRP 432(2002) as modified by Archana.G.Gulati 

Some developed and many developing countries may however find themselves in a less than ideal situation where USFs are funding more than the actual access gap on account of failure to  achieve market efficiency.  

An important aspect of effective regulation in today's world is spectrum management. OFCOM's liberalization of spectrum policy in consumer interest a reported at http://www.mobileworldlive.com/uk-regulator-gives-green-light-for-4g-in-2g3g-spectrum is an example of such effective regulation. An article titled "Key to robust telecom policy: Place markets above command and control" that appeared in the Economic Times on July, 8 2013 may also be of interest to readers. It highlights  inter alia the requirement of effective spectrum management in India including flexibility of its usage across technologies.

National Broadband Networks-Easier Said Than Done

While many nations have rightly put in place national broadband plans to ensure full participation of their citizens in information society, ambitious state aided  national broadband plans do face many difficulties.

Australia's NBN being rolled out by its incumbent operator TELSTRA appears to face in addition to technological issues, problems with competition regulation and uncertainty of political backing  as may be seen here: 

http://www.telegeography.com/products/commsupdate/articles/2013/06/21/accc-report-confirms-telstra-breached-competition-safeguards/

Singapore which adopted a successful market driven strategy has problems too, but on the demand side. Please see http://www.totaltele.com/view.aspx?ID=481850.

I continue to believe that the incumbent driven model of network roll out while it appears easier and quicker in the short run creates a regulatory burden/obligations akin to regulation of  monopoly wire line providers of the past. This also means substitution of network competition with service competition which again demands effective regulation. At least developing countries are perhaps not well equipped to deal with this requirement. Please see my previous posts on this issue at 

http://ictsforall.blogspot.in/search/label/Broadband%20networks

National Broadband Networks: Regulation, Universal Service, Competition and Monopolies

One of the fundamental principles of Universal Service (US) is that it should complement and supplement effective regulation, liberalization and competition rather than replace these measures as a means of achieving greater telecommunications penetration. In fact, Universal Access (UA)/ US as obligations or policy instruments should ideally come into play when these measures have failed to address what is known as the actual access gap. This gap may arise on account of geographical or socio-economic reasons etc.

Source: WDRP 432(2002) as modified by Archana.G.Gulati 

With this in view, legal   definitions of Universal Service (as in the EU and USA ) often have an explicit references to competitive neutrality. However, while The European Union’s Universal Service Directive adopts a meticulous approach whereby market distortions are consciously  avoided at every step be it the  scope of US,  choice of technology, choice of Universal Service Providers(USPs), source of funding US etc. USA’s approach is not so rigorous. Similarly the Indian USOF legal framework lacks any such explicit reference or obligation to carry out an ex ante analysis to establish market failure or ensure competitive neutrality of US interventions.

Over the past two decades dramatic progress has been made in telecommunications penetration, particularly in mobile voice segment. This has been possible on account of technological innovations and competition which drives service providers to innovate, improve quality and meet customers’ demand at affordable prices. In a monopoly environment as persisted before the onset of mobile services, the regulatory burden of ensuring affordable services was much higher as the incumbent operator/operators were subject to various tariff restrictions and interconnection regulations to prevent misuse of monopoly /oligopoly situation. Non discrimination and transparency of information as well as consumer protection, while they are regulatory concerns even in competitive markets become far more acute in case of monopolies.

Given the importance of high speed broadband and the fact that roll out in certain markets would not be economical, governments across the world are funding OFC based broadband networks.The rationale for/criticism for focusing on OFC in backahul  or access services would merit a separate discussion, but is definitely a key issue as it impinges on technological neutrality which is a subset of competitive neutrality.

While most of these these public/US funded OFC networks are slated to be open access networks, care should be taken to avoid displacing private investment and initiative which may have been forthcoming with the right regulatory environment or incentives. Use of public funds/universal service funds should ideally be restricted to areas where markets have failed and logically the best course is to bid out such network provision to allow a level playing field between private and public operators. This may lead to a more fragmented approach than one integrated network but contractual obligations can ensure seamless connectivity between and non-discriminatory open access to backbone networks owned by various entities.  (see previous blog post) Such a PPP approach rather than publicly/incumbent owned networks may prove to be more competition and growth friendly in the long run even if it entails more effort in the short term. The use of public funding in pockets where no operator will venture or where effective competition is unlikely in spite of effective regulation (akin to European Commissions white or grey areas) is however justifiable. 

ITU's Trends in Telecommunications Reform 2013, has made a pertinent observation:

   'Developing countries in particular face challenges in promoting growth of Internet assets that will   support the widespread availability and adoption of broadband. These differences are based in part on geography, distance, and scale, but are also highly sensitive to competitive conditions within each country and to related choices by governments with respect to liberalization.'

It is seen that Australia’s NBN which is to be rolled out by the incumbent TELSTRA, is subject to overview by the Australian Competition and Consumer Commission (ACCC) and will be a purely wholesale network. Obligations of structural separation have been imposed on TELSTRA through a structural separation undertaking (SSU) to prevent conflict of interest and ensure a level playing field in downstream markets. The Indian NOFN may need to consider similar precautions vide a suitable regulatory framework.

I found some though provoking comments for and against on NBN at
http://nbnconcerns.wordpress.com/. and
http://www.malcolmturnbull.com.au/media/speeches/three-years-of-nbn-2-0-what-have-we-learnt/.      
A comparison with New Zealand and Singapore has been blogged here
 http://www.zdnet.com/nbn-how-aust-compares-to-singapore-and-nz-7000007426/.

A comparison with South Korea is blogged at http://www.computerworld.com.au/article/426682/nbn_vs_world_korean_experience/. What is distinctive about South Korea's success is the tackling of the entire broadband value chain and retention of competition as a means to spur growth. 

As the close of this entry I reproduce an extract from the Conclusion of the ITU Report on State of Broadband 2012.

 Broadband networks and services are more than simple infrastructure – they represent a set of transformative technologies that promise to change the way we communicate, work, play and do business.  It is essential that every country  takes  broadband  policy  into account to shape its future social and economic development and prosperity, emphasizing both the supply and demand sides of the market. Further, it is crucial to adequately evaluate the potential alternatives to be implemented in order to encourage private sector investment. A “one size fits all” policy to broadband roll-out could have negative implications for the ICT market. Finally, a detailed cost-benefit approach should be adopted when evaluating different public policies and regulatory options to promote the growth and development of broadband in different countries around the world.