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Role of benchmarks in the regulation of partially competitive markets

Rohan SamarajivaBenchmarking and regulation Workshop, Malé6 December 2007

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Agenda

Why regulate? Special case of micro states

Allocating limited regulatory resources Possible solutions to problems of tariff,

access and termination rate setting Competition for the market Banded forbearance

Foundation is benchmarking

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What are the conditions for optimally functioning markets? No barriers to entry and exit

Multiple buyers & sellers No market power

Homogenous products Perfect information Rational participants (homo

economicus)

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Conditions for workable markets

Markets that do not satisfy information and rationality conditions

Are telecom markets workable? But telecom markets do not satisfy even the

remaining conditions Barriers to entry and exit

Scarce resources

Increasing returns; essential facilities Potential to extend market power from one

market to another Peculiarities of call termination: “market of one”

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Special case of micro states (< 1 m population)

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

Siz

e o

f e

co

no

my

GD

P i

n U

S $

mil

lio

ns

1 operator

2 operators

3 op

erat

ors

4 op

erat

ors

5 op

erat

ors

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Conundrum of regulation in micro states Unlikely to achieve even the conditions of

workable competition Though evidence does not support claim that

micro states have to be monopoly duopoly markets

Therefore, less space to apply asymmetric regulation/forbearance

Applying conventional monopoly regulation requires lots of resources for regulatory agency Simple constraints of a micro state preclude a

large regulatory agency

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Allocating limited regulatory resources

To achieve good performance, every regulator must prioritize tasks Micro-state regulators must prioritize even

more and be highly disciplined in allocating limited regulatory resources to the most important tasks

What are the priorities for the Maldives?

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Ranking regulatory tasks . . .

Market entry/licensing

Spectrum management, including refarming

Access and interconnection

Tariff regulation

Quality of service regulation

Regulation of anti-competitive practices

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Ranking regulatory tasks . . .

Universal service

Mobile number portability

Rights of way

Consumer protection

Internet governance

Type approval of equipment

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Two that will be highly ranked in any list

Access and interconnection Fundamental to competition Enables sharing of essential facilities,

which is even more important in micro states E.g., inter-island links and international

cables

End-user tariffs Integrally related to QOS

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Key problems in tariff, access and termination rate setting

How to set access and termination prices?

How to determine if a tariff is reasonable?

Discussion of tariff determination in monopoly conditions Most elements overlap with determination

of access and termination prices

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Tariff regulation

In a fully competitive market, prices will be set by interaction of supply and demand India has highest levels of competition in

the region Forborne tariff regulation, except in limited

cases Highest TRE scores for tariff regulation Widely perceived as having the lowest prices

(actually not so)

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Bangladesh, Pakistan, Sri Lanka & India mobile tariff baskets compared (USD), December 2007

Cheapest prepaid Cheapest postpaid

2.914.22 3.92 4.44 4.04 3.72

6.82

8.86

7.01 7.28

9.4210.91

9.89

7.00

16.46 16.5214.84

13.07

19.47

23.12

21.28

13.42

34.01

30.22

0.00

5.00

10.00

15.00

20.00

25.00

30.00

35.00

40.00

Pre

pa

id

Po

stp

aid

Pre

pa

id

Po

stp

aid

Pre

pa

id

Po

stp

aid

Pre

pa

id

Po

stp

aid

Pre

pa

id

Po

stp

aid

Pre

pa

id

Po

stp

aid

Pre

pa

id

Po

stp

aid

Pre

pa

id

Po

stp

aid

Pre

pa

id

Po

stp

aid

Pre

pa

id

Po

stp

aid

Pre

pa

id

Po

stp

aid

Pre

pa

id

Po

stp

aid

BD PK LK IN BD PK LK IN BD PK LK IN

Low User Medium User High User

US

D

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“Per minute” USD Bangladesh Pakistan India Sri Lanka

Postpaid Prepaid Postpaid Prepaid Postpaid Prepaid Postpaid Prepaid

Xplore1 SmileFreedo

m Plan 1Jazz

Budget

Standard 99 Plus

Regular Lite 103

KIT Standar

d

Connection Charges 11.70 2.19 8.16 8.16 6.33 2.50 9.05 7.24

Subscription (rental) fee 1.46 0 0 0 2.50 0 0.90 0

- Incoming 0 0 0 0 0 0 0.036 0.054

- Outgoing (Fixed local) 0.022 0.029 0.041 0.041 0.050 0.061 0.054 0.054

- Outgoing (Fixed national) 0.022 0.029 0.041 0.041 0.050 0.070 0.054 0.054

- Outgoing (On net) 0.022 0.029 0.033 0.029 0.030 0.030 0.027 0.036

- Outgoing (Off net) 0.022 0.029 0.053 0.041 0.030 0.051 0.054 0.054

On net SMS 0.022 0.022 0.016 0.016 0.030 0.030 0.009 0.009

Off net SMS 0.029 0.029 0.016 0.024 0.030 0.030 0.018 0.018

- MMS 0 0 0.098 0.098 0.127 0.127 0.018 0.018

- Voicemail 0 0 0.065 0 0.076 0.076 0.027 0.027

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Cheapest prepaid Cheapest postpaid

14.7321.39

12.65 14.34 14.99 13.80

27.4735.64

66.26 66.51

30.4135.22

36.67

25.98

66.26 66.51

75.21

66.2362.84

74.6478.93

49.77

136.87

121.65

0.00

20.00

40.00

60.00

80.00

100.00

120.00

140.00

160.00

Pre

pa

id

Po

stp

aid

Pre

pa

id

Po

stp

aid

Pre

pa

id

Po

stp

aid

Pre

pa

id

Po

stp

aid

Pre

pa

id

Po

stp

aid

Pre

pa

id

Po

stp

aid

Pre

pa

id

Po

stp

aid

Pre

pa

id

Po

stp

aid

Pre

pa

id

Po

stp

aid

Pre

pa

id

Po

stp

aid

Pre

pa

id

Po

stp

aid

Pre

pa

id

Po

stp

aid

BD PK LK IN BD PK LK IN BD PK LK IN

Low User Medium User High User

US

D

Bangladesh, Pakistan, Sri Lanka & India mobile tariff baskets compared (USD PPP), December 2007

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"Per minute“ PPP Bangladesh Pakistan India Sri Lanka

Postpaid

Prepaid Postpaid Prepaid Postpaid

Prepaid

Postpaid Prepaid

Xplore1 SmileFreedom Plan

1Jazz

BudgetStandard 99

PlusRegul

ar Lite 103KIT

Standard

Connection Charges 59.29 11.12 26.33 26.33 25.46 10.08 33.57 26.85

Subscription (rental) fee 7.41 0 0 0 10.08 0 3.36 0

- Incoming 0 0 0 0 0 0 0.134 0.201

- Outgoing (Fixed local) 0.111 0.148 0.133 0.132 0.203 0.244 0.201 0.201

- Outgoing (Fixed national) 0.111 0.148 0.133 0.132 0.203 0.280 0.201 0.201

- Outgoing (On net) 0.111 0.148 0.105 0.095 0.122 0.122 0.101 0.134

- Outgoing (Off net) 0.111 0.148 0.171 0.132 0.122 0.204 0.201 0.201

On net SMS 0.111 0.111 0.053 0.053 0.122 0.122 0.034 0.034

Off net SMS 0.148 0.148 0.053 0.079 0.122 0.122 0.067 0.067

- MMS 0.316 0.316 0.509 0.509 0.067 0.067

- Voicemail 0.211 0.305 0.305 0.101 0.101

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If not through competition, how?

“Find out the cost; add a reasonable return; determine revenue requirement; set prices” or “Rate of return rate base regulation”

First two steps are the most troublesome Uniform reporting system of accounts Used and useful test Cost of capital

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What are the alternatives?

Competition for the market Banded forbearance

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Competition for the market

Auction the license, with a requirement that the prices are part of the bid Used in Morocco for 2nd GSM license

Price cap or similar formula for periodic adjustments Ceilings and floors (to prevent predation and price

squeeze) Difficult to implement in dynamic environment

Periodic rebidding Creates conditions for rent seeking and depresses

“patient” investment

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Banded forbearance

Concept being developed by LIRNEasia Identify peer group

E.g., other micro states But natural is adjacent countries

Define benchmark and period (once a year; once every two years . . . ) Need not be the lowest

EU uses third from the bottom Can be lowest plus x%

Define band: floor and ceiling

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Banded forbearance

Anything goes within the band Tariffs must be filed Evaluated only for

Clarity to consumer Whether within the band Default approval within x days

When tariff dips below the floor, investigate for anti-competitive impact only

If tariff goes above ceiling, no alternative but to start a cost inquiry Need to identify interim solution, while inquiry is

underway

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Merits of banded forbearance

Asymmetric regulation, which also saves regulatory resources, deregulates non-dominant operators but requires dominant operator to file tariffs Cause of great unhappiness on part of dominant

operator Regulator still has difficulty properly regulating

dominant operator’s tariffs In oligopoly conditions, non-dominant operators

may just shadow the incumbent’s prices Banded forbearance applies to all operators Deregulates incumbent, while providing

safeguards against predation