Process and impact of market liberalisation: Worldwide trends

Dr Tim Kelly, ITUTuesday 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.

AgendaAgendaMarket liberalisation: Trends

Why? Where? When? How fast?

WTO market liberalisation processAlternatives to competition/privatisation

Build/Transfer arrangements

Impact on tariff rebalancingUniversal service concerns

Does competition bring the expected benefits?

Degree of competition in basic Degree of competition in basic services, 1998, by regionservices, 1998, by region

Source: ITU Telecommunication Regulatory Database.

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Africa Americas ArabStates

Asia-Pacific

Europe

Monopoly

Competition

Status of competition by market Status of competition by market segment, worldwide, 1998segment, worldwide, 1998

Source: ITU Telecommunication Regulatory Database.

InternationalLocal Long distance

47%

Competition

53%

Monopoly

56%

Competition

44%

Monopoly

54%

Competition

46%

Monopoly

Degree of competition in mobile Degree of competition in mobile services, by region, 1998services, by region, 1998

Source: ITU Telecommunication Regulatory Database.

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

Africa Americas Arab States Asia-Pacific Europe

Monopoly

Competition

Why introduce competition into Why introduce competition into the Sector?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 consumersTo improve level of teledensity and pace of network roll-

out

Competitive markets tend to grow Competitive markets tend to grow faster than monopolistic onesfaster than monopolistic ones

Cellular subscribers per 100 inhabitants,

developing countries

-

0.20

0.40

0.60

0.80

1.00

1992 1993 1994 1995 1996

Competitivemarkets

Non-competitive

marketsSource: ITU “World Telecom Development Report 1998: Universal Access”

0

25

50

75

100

125

150

175

200

1990 1991 1992 1993 1994 1995

Competitive markets

Non-competitive markets

Source: ITU World Telecommunication Development Report, 1996/97.

Growth in international traffic per line, in Growth in international traffic per line, in emerging markets (1990=100)emerging markets (1990=100)

Different approaches to market Different approaches to market liberalisationliberalisation

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.

From duopoly to competition ...From duopoly to competition ...

0

2'000

4'000

6'000

8'000

85 86 87 88 89 90 91 92 93 94 95 96

Mobile cellular subscribers in the UKIn thousands

Licensing of tw o additional digital service providers

Source: ITU “World Telecom Development Report 1998: Universal Access”

Trade in telecoms: The WTO Trade in telecoms: The WTO processprocess

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)

WTO timetableWTO timetable

1986-1993: Uruguay Round15 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 BTANovember 1999: New round launched in Seattle?

General Agreement on Trade General Agreement on Trade in Services (GATS) principlesin Services (GATS) principles

Most-favoured nation (MFN), Article IITransparency, Article IIIDomestic 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)

Countries permitting competition in Countries permitting competition in basic telecoms:basic telecoms:1990 1995 1998JapanUnited KingdomUnited States

AustraliaCanadaChileFinlandJapanKorea (Rep.)New ZealandPhilippinesSwedenUnited KingdomUnited States

AustraliaAustriaBelgiumCanadaChileChinaDenmarkEl SalvadorFinlandFranceGermanyGhanaHongkong SARIsraelItalyIreland (Dec 98)

Japan Korea (Rep.)MexicoNew ZealandNetherlandsNorwayPhilippinesRussiaSpain (Dec 98)SwedenSwitzerlandUgandaUKUSA

plus others ....

35%46%

74% 85%

1990 1995 1998 2005

Mono-poly

Compe-tition

4 14 29 48

Number of countries permitting more than one operator for international

telephony

Percentage of outgoing international Percentage of outgoing international traffic open to competitiontraffic open to competition

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.

Level of competition in Level of competition in international services in WTO international services in WTO basic telecoms agreementbasic telecoms agreement

CompetitionMonopoly

Source: ITU Telecommunication Regulatory Database.

African countries making GATS African countries making GATS commitments to liberalisationcommitments 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

Alternatives to introduction of Alternatives to introduction of competitioncompetition

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)

Examples of strategic foreign Examples of strategic foreign investors in mobile, SADCinvestors in mobile, SADC

Country MobileOperator

Foreigninvestor

Stake

Botswana Vista France Telecom 51%Botswana Mascom Portugal Telecom /

EcoNet (Zimbabwe)49%

Lesotho VCL Vodacom (RSA) 51%Malawi TNM Telekom Malaysia 60%Mauritius Emtel Millicom

(Luxembourg)50%

Mozambique TMM Deutsche Telekom 26%Namibia MTC Telia (Sweden) 26%South Africa Vodacom Vodafone (UK) 32%Swaziland Swazi MTN MTN (South Africa) 31%Tanzania MIC Millicom 57%Tanzania TriTel TRI (Malaysia) 60%Zambia Telecel Telecel (USA) 70%Zimbabwe Telecel Telecel (USA) 40%

Private sector participation Private sector participation through “Build/Transfer”through “Build/Transfer”

-

1

2

3

4

5

6

7

1990 1991 1992 1993 1994 1995 1996

0

1

2

3

4

5

6

7Pre-

Build /Transfer

Post-Build /Transfer

Tele-density

Contractors

TOT

ThailandTwo 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

Source: ITU “World Telecommunication Development Report 1998: Universal Access”

Regional franchises (KSOs): Regional franchises (KSOs): IndonesiaIndonesia

Impact of competition on tariff reformImpact of competition on tariff reformHistorically, 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?

0

2

4

6

8

10

12

1990 1991 1992 1993 1994 1995 1996 1997

300 minutes, local calls

3 mins Int'l call to US

Monthly line rental

Tariff rebalancing trends, in US$ Average of 39 major economies

Source: ITU World Telecommunication Indicators Database.

$12.83

$12.05

$9.75

$9.39

$8.94

$8.91

$8.53

$7.22

$7.11

$5.15

$4.16

$4.12

$3.43

$3.19

Argentina

S. Africa

Mexico

Average

Brazil

Hongkong

Philippines

Indonesia

Malaysia

India

Venezuela

Turkey

Russia

Thailand

Monthly residential subscription, in US$: Selected countries plus World average

Source: ITU World Telecommunication Indicators Database.

… … lead to faster lead to faster growth ratesgrowth rates

Monthly residential subscription charges, US$

$-

$2

$4

$6

$8

$10

1990 1991 1992 1993 1994 1995 1996

Uruguay

Malaysia

Hungary

MoroccoPercentage of households with telephone

0

10

20

30

40

50

60

70

1990 1991 1992 1993 1994 1995 1996

Malaysia

HungaryUruguay

Morocco

Higher monthly subscription

charges ...

Source: ITU World Telecommunication Development Report, 1998: Universal Access.

Long distance market share% share of long distance calls

0%

5%

10%

15%

20%

25%

30%

35%

1991 1992 1993 1994 1995 1996

NCCs (Japan) Clear (NZ) Optus (Aust.)

Long distance pricesIndex, 1993=100

75

80

85

90

95

100

1993 1994 1995 1996

JapanNew ZealandAustralia

As competitors gain market share ...

Long distance prices come

down ...Source: ITU Asia-Pacific Telecommunication Indicators, 1997.

Universal service: Fears and responsesUniversal service: Fears and responsesCompetitors 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)

Teledensity in Philippines (competitive) Teledensity in Philippines (competitive) and Pakistan (monopoly)and Pakistan (monopoly)

0

0.5

1

1.5

2

2.5

3

1989 1990 1991 1992 1993 1994 1995 1996 1997

Philippines

Pakistan

Introduction of competition in Philippines

The benefits of liberalising the market The benefits of liberalising the market for privately-operated payphonesfor 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

P a y p h o n e s in S e n e g a l

0 %

1 %

2 %

3 %

4 %

5 %

6 %

7 %

8 %

9 %

1 9 9 3 1 9 9 4 1 9 9 5 1 9 9 6 1 9 9 7

A s % o f m ain l in es

Per 1 '0 0 0in h ab i tan ts

Source: ITU World Telecom Indicators Database.

Positive impact of competition Positive impact of competition on Telstra (Australia)on Telstra (Australia)

-

2

4

6

8

10

12

14

1990 1992 1994 1996

Rev

enu

e (U

S$b

n)

-

0.5

1.0

1.5

2.0

Pro

fits (US

$ bn

)

Revenue

Profit

Conclusions: Getting the recipe Conclusions: Getting the recipe rightright

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 regulatorAddress interconnection issues

Interconnection will make or break competition

Set out strategy for achieving Universal Access / Universal Service