Year 2000 Conference: Alternative Development:

The Role of the Services Sector

Institute of Social &conomic Research!
"niversit# of the $est In%ies!
Cave &ill Campus! 'ar(a%os
)anuar# *2+*,! 2000
Dealing with Public Interest in the Changing Nature of the Provision
of Infrastructure Services, with emphasis on the Telecom Sector
Sherry M. Stephenson
-
and Soonhwa Yi
Abstract
The so-called infrastructure services such as roads, railways, ports, public utilities and
telecommunication services have been traditionally thouht of as state-owned activities,
due to the public ood aspects of their provision. !or many countries the state has been
the sole purveyor of these services to the public. "ecently this situation has come under
revision, with the privati#ation, liberali#ation, and dereulation of many of these
infrastructure services now underway in several countries of the world. Such efforts have
chaned the nature of the state$private sector relationship.
The chanin nature of ownership of infrastructure services has been put into %uestion, as
national efforts at restructurin aim to ma&e mar&ets more contestable throuh reater
competition. 'reater efficiency is now bein viewed as the prime factor behind the
eneration of more cost-effective infrastructure services for the public. Separation of the
use of the service itself from the provision of the infrastructure is a &ey consideration in
this new approach to the provision of services. This has been the approach ta&en in the
telecommunication sector, particularly emphasi#ed in this paper. The state can continue to
play a &ey role, however, throuh the adoption of appropriate reulatory policies which
will foster not only more efficient service output but also serve to stimulate economic
development and promote welfare. (n the )aribbean reion, countries should ta&e into
account considerations of mar&et si#e when desinin reulations to brin about an
appropriate competitive structure for infrastructure services, especially
telecommunications.
*
Sherry M. Stephenson is an international trade specialist with the Trade Unit of the Organization of
American States in Washington, D.C. mail! sstephenson"oas.org. Soonhwa #i is a trade cons$ltant at
the OAS. mail! tradecons%"oas.org.
+
I.TR/D"CTI/.
(n most countries overnment or the public sector has traditionally been the sole
purveyor of infrastructure services such as telecommunications, railroads, roads, port
services, electricity, as, water and sanitation services. The public sector has thus en,oyed
a monopoly position in ownership and reulation of these infrastructure services. Such a
policy was desined to prevent mar&et failure and to protect the public interest. As private
firms pursue profit ma-imi#ation as the oal in their economic activities, it was felt that
such the pursuit of such a narrow ob,ective would hamper resource allocation in
infrastructure services where public interest is the main focus. Therefore, the overnment
too& over these activities in order to decrease ris& and avoid mar&et failure throuh public
provision of the service and throuh appropriate reulations.
The above perception has come under considerable revision in recent years.
Technoloical innovations and the onoin process of increasinly interated national
mar&ets due to lobali#ation have made the ,ustification for the purpose and the e-istence
of state-owned monopolistic infrastructure and reulation obsolete. Technoloical
advances and rowin trade have meant that public services are now e-posed to
internationally competitive mar&ets and are no loner isolated within national boundaries.
(nternational competition has made the sole public provision of infrastructure services
inefficient with respect to both public interest and resource allocation. (n liht of this
chaned situation, many overnments are actin to liberali#e their infrastructure services
throuh privati#ation and$or the introduction of competition in other forms.
As shown in Table ., investment in privati#ed state enterprises has been steadily
rowin worldwide, especially in developin countries. )ountries in the /ast Asia and
0acific reion invested up to 1S234 billion in .554, which is more than si-teen times the
amount invested in .55+ 61S2 7.3 billion8. (n terms of value, 9atin America and the
)aribbean reion financed the larest volume in privati#ation: 1S2.3 billion in .55+ and
1S2 ;; billion in .55<, with /ast Asia and the 0acific accountin for only 1S25 billion
durin the same year.
.
9iberali#ation and dereulation of infrastructure services are not limited to
developin countries only. These are &ey issues as well for developed countries. The
1nited States, for e-ample, bean to dereulate its 1S 27.=billion electricity mar&et in
.55<
.
. The &inancial Times has reported that nine individual states 6)alifornia, Montana,
(llinois, Michian, >ew Yor&, Massachusetts, "hode (sland, >ew ?ersey, and
0ennsylvania8 have either finali#ed a prescriptive leislative or reulatory plan or beun to
phase in retail access to electricity, and that 7@ states have beun allowin consumers and
wholesalers a choice in electricity mar&ets. The issue of dereulation in utilities is still
actively debated inside the country.
This paper focuses the discussion of liberali#ation and dereulation of publicly-
provided infrastructure services, with particular emphasis on the telecommunications
sector. This emphasis is due to the important role this sector plays in both economic
rowth and the overall efficiency of national economies, as well as to the e-traordinary
chanes that have been brouht about in communications throuh rapid technoloical
developments. 9iberali#ation of telecommunications activities and the introduction of
reater competition in domestic mar&ets have one hand in hand with privati#ation and the
creation of independent reulatory bodies. The paper discusses the issues of privati#ation,
competition, the economic benefits of liberali#ation, and the need for an ade%uate
reulatory framewor&. (t concludes with suestions for telecommunication reform in the
)aribbean.
.
!inancial Times. Aecember <, .555.
7
Table 1. Investment in Infrastructure Service Projects with Private Participation
in Developing Countries b Sector an! "egion, 1##$%1##& '1##& (S) billions*
*000 *00* *002 *001 *00, *002 *003 *004 *005
Total
Sector
Telecommunications ;.; .3.. 4.5 .+.5 .5.= 7+.. 33.@ @5.; =3.. 7.@.+
ner6# ..; ..7 .... .@.3 .4.. 73.5 3@.5 @;.7 7;.7 .44..
Transport 4.= 3.. =.4 4.@ 4.; 4.= .3.. .;.3 .@.+ <7.7
$ater an% sanitation +.+ +.. ..< 4.3 +.< ..@ 7.+ <.@ ..= 73.3
"egion
/ast Asia B 0acific 7.3 @.+ <.4 .=.5 .4.3 7+.@ 3..= 34.; 5.= .@4.7
/urope B )entral Asia +.. +.3 +.= ..= 3.5 <.@ .+.4 .=.3 ...3 =7.+
9atin America B
)aribbean
.7.5 .7.3 .4.. .<.+ .<.@ .5.+ 74.@ @=.. ;;.3 73;.=
Middle /ast B >orth
Africa
+.+ +.+ +.+ 3.3 +.3 +.. +.3 =.7 3.; .7.<
South Asia +.3 +.< +.. ..7 @.3 @.+ ...@ .3.4 7.3 3<..
Sub-Saharan Africa +.+ +.+ +.. +.+ +.4 ..+ 7.+ 3.= 7.3 5.;
Total
.=.; .4.@ 7;.; 35.5 @@.5 =7.5 <3.3 .7+.@ 5=.3 @5;.7
So$rce! Corld Dan&
7RI8ATI9ATI/.
9iberali#ation in state-owned infrastructure services enerally involves both
privati#ation and steps to create a more competitive mar&et.
7
Some developin countries
privati#e public provision of infrastructure services as an initial step towards liberali#ation
and introduce competition afterwards. Ether countries introduce competition as well as
privati#ation simultaneously. The se%uence of privati#ation and the move to competitive
mar&ets depends upon the mar&et readiness and political-economic environment of a
country.
1nder a broad definition, privati#ation means both dereulation and the
7
0etra##ini, .55;.
3
transference of established property rihts in infrastructure services from public to private
ownership and control. Aereulation is a means to privati#e public infrastructure by liftin
reulations on new entrants. More commonly, however, privati#ation refers to a transfer of
property rihts for infrastructure services from the public to the private sector.
(n the .55+s, numerous developin countries have increased the participation of
the private sector in infrastructure services. Accordin to the Corld Dan&,
telecommunications and enery have been the leadin sectors in attractin private sector
participation, in particular in 9atin America and /ast Asia 6Table .8. (nvestment in
telecommunication pro,ects with private participation for all developin countries rew
between .55+-.55< from around 1S24 billion to nearly 1S2=3 billion. )umulative
investments in telecommunications amounted to @3 percent of flows to all infrastructure
service sectors durin that period.
3
Chen introducin privati#ation, overnments face a problem of information
asymmetry. /very private firm has its own information on production costs that are not
easy for the overnment to observe e' ante. (t is natural that firms are reluctant to disclose
this information which serves to shape strateic behavior. 'overnments must resolve the
information asymmetry problem by devisin schemes to motivate firms to volunteer this
information in order to help in better monitorin the privati#ed activity.
Methods of privati#ation vary accordin to countries and sectors. There are several
ways to privati#e: this may be done throuh auctions, tenders, direct neotiations, stoc&
e-chane, and$or public offers. This paper discusses auctions and public offers because
these two methods are the most prominent ones employed by overnments and are also
the most effective in resolvin$preventin the problem of information asymmetry.
+uctions
0ublic auctions can help minimi#e rent from privati#ation. "eulators may set a
%ualification standard and re%uire that only mar&et participants who meet such
%ualifications can be bidders. /liible mar&et participants willinly reveal their private
information on production costs when biddin. A overnment selects only one firm amon
3
"oer.
@
several %ualified bidders and provides the franchise riht to the winnin bid. Didders &now
this fact and have a tendency to ta&e advantae of it: that is, they miht reveal false
information on production costs that are lower than the actual ones in order to win the
bid. 1nder the low bidder winnin mechanism, a overnment may have an adverse
selection due to that strateic behavior of firms.
To prevent an adverse selection, a overnment can lin& the compensation rules
under the franchise to the winnin bid.
@
(nterpretin that a low bid transforms into a hih
production cost after the contract, the overnment can tail a note on biddin
announcement that the winnin bidder will share additional costs. Accordin to many
scholars, a manner of doin so is li&ely to promote more aressive biddin.
Arentina, )hile, and Me-ico enacted an auction policy to prevent the information
and rent see&in activities of firms when liberali#in basic telecommunications services.
=
Aurin the biddin process, such countries received more than one bid from potential
suppliers
;
. (t implies that they were capable of preventin the bidders from e-tractin
information rents. After liberali#ation, all three countries ended up with a monopoly in
basic telecommunications: )T) 6)ompania de Telefonos de )hile8 maintains 5. percent of
basic telecommunications service share in )hile. Defore the end of its concession for local
and domestic and international distance in .55< and in .554, T/9M/F
6Telecomunicaciones Me-icanos8 en,oyed monopoly services in Me-icos mar&et.
Arentinas basic telecommunications monopoly, />T/9 6/mpresa >acional de
Telecomunicaciones8 was divided into two reional monopolies in .55+: Telefonica de
Arentina became a monopoly provider of local, lon distance and international services in
the south and Telecom Arentina in the north.
4
Public ,ffers
The sale of sta&es throuh public offerin represents a privati#ation method by
@
'alal, et. al. .55=.
=
(bid.
;
(bid.
4
)owhey, et. al., .555
=
which the state shares are put up, for a pre-determined period and at a set price, for sale to
the population throuh a commercial ban& or other financial institution, which is a
professional participant at the statutory capital.
<
This means of privati#ation is desined to
distribute the property rihts of an infrastructure service from the state to a lare number
of the population. Therefore, the information asymmetry problem is not in %uestion. Thus
sale of sta&es thouh public offerins is considered to proceed in an ob,ective and
transparent way that mitiates the political pressures that usually arise in the privati#ation
process. En the other hand, the price set for such public offers is often %uite hih and the
process can be %uite costly.
Table 7 shows that three /ast Asian
5
countries 6Gorea, Malaysia and Sinapore8
used public offerin as the means to privati#ation in the telecom sector. All three countries,
however, sold only a part, and not the totality of the sta&es in the former monopoly
supplier 67+ percent in the case of Gorea, 7= percent for Malaysia, and .. percent for
Sinapore8. This partial liberali#ation contrasts with the approach adopted by 9atin
American countries 6Arentina, )hile, Me-ico, and 0eru8, who chose to completely
privati#e their monopoly telecom supplier when they introduced privati#ation in telecom
infrastructure.
Table -. Privati.ation of State Telecommunications ,perators
Co$ntry Stat$s of (ri)atization
Arentina />T/9 completely privati#ed in .55+.
)hile )T) and />T/9 completely privati#ed in .5<<
Gorea Gorea Telecom privati#ed since .553, 7+ percent sold.
Malaysia Tele&om Malaysia privati#ed in .55+, 7= percent sold.
Me-ico Telme- completely privati#ed in .55@.
0eru )0T and />T/9 completely privati#ed in .55@.
Sinapore Sinapore Telecom privati#ed since .55+, .. percent sold. 7=
percent to be sold by 7++7.
* />T/9: /mpresa >acional de Telecomunicaciones
* )T): )ompania de Telefonos de )hile
* Telme-: Telefonos de Me-ico
So$rce: Hufbauer, et. al. .55<, )owhey, et. al. .555 and Sinh, .55<.
?.0. Sinh concludes in his study that after privati#ation: Iservice provision
remains beholden 6and often limited8 to pressures from lare user roups and
<
"epublic of Moldova, .555
5
(bid.
;
overnmental preroatives in most countries, mar&et competition is either slow to emere
or messy where present, and difficult to manae, and while the diriiste top-down I/ast
Asia ModelJ continues to brea& down, the liberal alternative of bottom-up pressures and
poses serious problems in terms of its evolution.J
/vidence available to date from all reions indicates that developin countries that
have privati#ed their telecommunications systems have e-perienced much faster rowth in
their networ&s than those that have retained a state monopoly. (n Asia and 9atin America,
teledensity rowth in countries with privati#ed telecommunications has been double that of
countries with monopoly mar&ets durin each of the five years followin privati#ation.
.+
C/:7TITI/.
A parallel component of the reform of infrastructure services, alonside
privati#ation, is the introduction of competition. This is feasible when there are enouh
private firms in a iven domestic mar&et with the capacity to manae such bul& si#e
infrastructure pro,ects. !aster economic rowth has propelled the private sectors
involvement in economic activities and enriched the economic capacity of the private
sector in many countries enouh to handle infrastructure services.
However, in many cases the domestic mar&et is too small to support several lare
firms capable of purchasin service infrastructure activities. (n this situation, introduction
of competition may also be brouht about throuh allowin forein firms to participate in
the provision of infrastructure services on domestic mar&ets. 'overnments may open their
mar&et to forein firms and investors throuh the lowerin of leal and other barriers to
forein entrants in infrastructure service mar&ets. Chen infrastructure service mar&ets
remain monopoli#ed after privati#ation, overnments can achieve the effects of
competition throuh adoptin a policy of mar&et contestability. Enly with efficient
competitors, either domestic or$and forein, will the introduction of competition be
effective in service mar&ets.
,pen /ntr
.+
0etra##ini, the Corld Dan& 'roup, >ote >o. 5;.
4
(n eneral, overnments brin competition into service mar&ets after beinnin the
process of privati#ation, especially in the case of developin countries. However, carryin
out this process simultaneously instead can prove a much less costly solution for
overnments as it allows them to resolve the problem of information asymmetry. Chen
overnments allow several service suppliers to compete each other as part of the
liberali#ation process, then this competition should lead each participant to disclose its
information voluntarily. !acin competition, firms choose to be transparent rather than to
see& rent from lac& of information disclosure in order to earn contracts.
Cith respect to entry policy, a state may choose to open an activity either fully or
partially. Chen there are potentially several competent competitors, the overnment can
completely liberali#e mar&et entry with respect to domestic and$or to forein companies.
However, confronted with relatively wea& mar&et conditions, the overnment may open
entry only to %ualified domestic firms throuh issuin licenses. (n recent years, completely
open entry has been the prevalent policy followed by most overnments in liberali#in the
telecommunications sector, and this has contributed to rapid technoloical proress. Many
developin countries have embraced full competition, especially in lon distance telephone
calls, international phone calls, cellular phone calls, and value-added services. However, a
lare number of these overnments have also chosen to have this competitive situation
phased in over a certain period of time.
Table 3 shows the status of liberali#ation in various telecommunications activities
in several developin countries. )hile and the 0hilippines have introduced competition by
openin entry completely and without discrimination to all telecommunications activities.
They manaed to resolve the information asymmetry problem throuh introducin
competition alon with privati#ation. However, this has been a slow process in practice. A
iantic telecommunication company still has a monopoly share in the mar&et of each
country: )ompania de Telefonos de )hile 6)T)8 occupies 5. percent
..
of domestic basic
telecommunications mar&et in )hile and 0hilippine 9on Aistance Telephone 609AT8
maintains 5@ percent of mar&et share
.7
in the 0hilippines.
..
Dradford, .555.
.7
'alal, et. al., .55=.
<
Telefonos de Me-ico 6T/9M/F8 still maintains an effective monopoly in the local
telephone mar&et in Me-ico since its privati#ation in .55@, althouh it has had to confront
competition in lon distance and international telephone services as of .554 and in local
services as of .55<, when e-clusive concessions were finali#ed.
.3
Si- new entrants 6both
forein and domestic8 bean lon distance services after the end of Telme-s monopoly
concession for domestic and international lon distance calls in ?anuary .554.
Table 0. Status of 1iberali.ation in Telecommunication Services
)ountry Mar&et Structure
9ocal 9on Aistance (nternational Kalue-added
Services
Cireless$
)ellular
Arentina Auopoly Auopoly Auopoly )ompetition )ompetition
)hile )ompetition )ompetition )ompetition )ompetition )ompetition
Gorea Monopoly )ompetition )ompetition )ompetition )ompetition
Malaysia Monopoly )ompetition )ompetition )ompetition )ompetition
Me-ico )ompetition )ompetition )ompetition )ompetition )ompetition
0eru Monopoly Monopoly Monopoly )ompetition )ompetition
0hilippines )ompetition )ompetition )ompetition )ompetition )ompetition
So$rce: Hufbauer, et.al, .554 and Dradford, .555.
All of the countries included in Table 3 allow competition policy in cellular and
value-added services mar&ets. )ompetitive providers are however sub,ect to the obtention
of licenses. Arentina and )hile have four licensed competitive cellular service providers,
while Me-ico and 0eru have two licensed providers.
.@
(t is interestin to note that all
countries in Table 3 have liberali#ed their value-added and cellular telecom activities, while
some still maintain a monopoly or duopoly in the provision of basic services 6local, lon
distance, and international8. The latter basic services are usually those liberali#ed most
slowly.
2ar3et Contestabilit
Telecom reulators cannot observe a firms production costs. Therefore, a threat to
the effectiveness of a contract ranted to a telecom provider e-ists e- post due to the
imperfect &nowlede possessed by reulators e- ante. Ence the franchise contract is
ranted, the lac& of competitive behavior by the firm may become evident. The firm may
.3
Dradford, .555.
.@
Dradford, .555.
5
utili#e its position to nelect its duty to operate efficiently, i.e. it may inflate its production
costs and$or it may provide low %uality of services.
To mitiate this situation, a overnment can desin a concession period and service
%uality e-pansion throuh procompetitive reulations. The overnment may ive an
e-clusive concession to a telecom provider for a certain period of time, for e-ample seven
years. Defore the concession period ends, reulators can evaluate the performance of the
incumbent. (f its performance is not satisfactory enouh to meet certain conditions, the
overnment can call upon an alternative producer to replace the incumbent.
Ac&nowledin this concession, the incumbent would have an incentive to operate its firm
efficiently. !or e-ample, Arentina, )hile, and Me-ico have all included provisions in the
operators license or the sale contract to obliate private operators to meet specific
networ& e-pansion and services %uality tarets, toether with a provision that failure to
meet these obliations ives the overnment rounds for revo&in the concession and
awardin it to another supplier. (n contrast, Malaysia and the 0hilippines did not elaborate
such specific re%uirements for networ& e-pansion and service %uality tarets in their
reulatory framewor&.
The Arentine overnment awarded each of its two reional monopolies an
e-clusive concession until 7+++ for domestic basic services only. The Me-ican overnment
ranted T/9M/F a three-year e-clusive concession for lon distance and international
services and a five-year concession for local service. The 0eruvian overnment awarded
Telefonica del 0eru 6Td08 an e-clusive concession until end ?une .555.
.=
(n all these
cases, the ob,ective of the overnments was to allow the monopoly supplier time to adapt
its operations in order to face competition after a certain date.
C/./:IC '.;ITS /; T<C/::".ICATI/.S <I'RA<I9ATI/.
Cost Savings
(t has been demonstrated that increased competition, combined with appropriately
reulated mar&ets, leads to lower prices for consumers. There is ample evidence from
countries that have liberali#ed their lon-distance mar&ets to underpin this statement. !or
.=
)owhey, et.al., .555.
.+
e-ample, in )hile rates dropped by @+ percent followin the introduction of competition in
international services, and the number of customers doubled.
.;
Analysts estimate that the
prospective cumulative savins worldwide from telecom liberali#ation may be as hih as
2. trillion for the .554-7+.+ period.
.4
These savins should benefit all reions and
consumers at all income levels within a country.
(n addition to lower prices, increased competition also leads to better access to
networ&s and better services. A .554 (T1 report on trade in telecommunications noted
that in emerin mar&ets, international traffic per subscriber rew by ...4 percent per year
from .55+ to .55= where competition was allowed, compared with ,ust =.7 percent per
year where there was a monopoly. The same effect, to a lesser e-tent, was found in
developed mar&ets.
)ompetition could also increase service %uality. (t spurs networ& build-out
dramatically. /vidence e-ists that investment in telecommunications infrastructure is a
stron predictor of economic rowth. (n order to accelerate economic development,
countries need to create policy environments that are conducive to a hih level of
investment in the telecommunications sector. )ompetition tends to multiply the incentives
for investin surplus revenues on networ& build-up. (n order for these benefits to accrue,
overnments may need to simultaneously privati#e infrastructure activities, which may be
carried out independently of the service provision activities of telecom firms.
The provision of new services and value-added ta-es that overnments may collect
on the commercial activities of telecom operators will also create new revenue streams for
overnments, who fear the loss of a traditional source of income. (n the lon run, revenue
from ta-able value-added activities of telecom providers can produce more income for the
overnment than the initial divestiture of its national telecommunications entity.
.<

4oreign Investment
Epenin the telecommunications sector to forein investment has enerally proven
to have positive effects on the development of telecommunications infrastructure and its
.;
The /conomist, .555.
.4
Accordin to estimates by Hufbauer, cited in 'loberman and Haen.
.<
Harr, .55<.
..
operation, as well as on lowerin the final cost to consumers. Some overnments have
limited the deree of forein ownership they allow in the sector, usually to an e%uity share
of less than =+ percent. Table @ shows that Me-ico allows forein ownership to a ceilin
of @5 percent, Gorea 33 percent and the 0hilippines @+ percent.
Some overnments, )hile for e-ample, do not impose any forein e%uity limits,
while others allow full forein ownership for new entrants but impose some limits for
incumbent suppliers. Many overnments have chosen to phase in their commitments to
increase forein investment in telecommunications activities over a period of time, as seen
above.
Table 5. "estrictions on 4oreign ,wnership in Telecommunications
Co$ntry *estriction on &oreign Ownership
)hile >one
Gorea 33 percent
Me-ico @5 percent
0hilippines @+ percent
So$rce: Hufbauer, et.al. .554.
>evertheless, it is important to reconi#e that the deree of forein e%uity that
overnments allow in the telecommunications sector cannot be ta&en as an indicator of the
actual or potential competition in the mar&et, since all the forein money may be invested
in only one 6includin the incumbent state-owned8 telecom supplier.
.5
However, the
benefits from forein investment for the country will be reater, the more competitive the
sector is, and the more mar&et-based incentives e-ist for further investment.
(n sum, many scholars assert that when liberali#in state-owned infrastructure
services, competition is much more preferable to privati#ation. 0rivati#ation, transferrin
property riht in infrastructure from public to private, usually ends up with private
monopoly as shown in empirical cases in the telecom sector. The private monopoly that
manaes infrastructure services without overnment subsidies is most li&ely to focus on
profit marins. Cithout competition the private monopoly has tendencies to undermine
public interest throuh increasin consumer prices and providin low %uality of services.
)ompetition, however, lowers consumer prices, increases service %uality, and induces
.5
9ow, et.al. .55<.
.7
forein investment. (n the telecom sector, for e-ample, competition resulted in e-pansion
of networ& and improvement of service %uality 6diiti#ation8. Such networ& e-pansion and
diiti#ation benefit consumers with reducin waitin time to et telephone service and call
failure rate. To wor& competition out in a proper way, appropriate procompetitive
reulation is re%uired. (t will avoid monopolistic nelience and enhance competition.
.D ;/R A. I.D7.D.T R="<AT/RY '/DY
0ro-competitive reulatory bodies are re%uired to enhance efficient competition in
liberali#ed infrastructure services. 0rivate service providers and forein investors prefer
independent reulatory aencies, whereas reulators often prefer to place these under the
overnment.
The CTE Areement on Dasic Telecommunications of !ebruary .554 consolidated
the importance of an independent reulatory body in the "eference 0aper that contains
uideline principles relevant to the reulatory framewor& for basic telecommunications
services. The followin summari#es the uidelines contained in the "eference 0aper.
i8 'overnments should prevent anti-competitive practices, i.e. Ienain in anti-
competitive cross-subsidi#ation, usin information obtained from competitors, and
not ma&in available to other suppliers on a timely basis technical information and
commercially relevant informationJ.
ii8 'overnment shall assure that interconnection networ&s or services are made
available to suppliers at any technically feasible point in the networ&. Such
interconnection is to be provided a8 under nondiscriminatory terms, conditions,
and rates, b8 Iin a timely fashion, on terms, conditions and cost-oriented rates that
are transparent, reasonable, havin reard to economic feasibility, and sufficiently
unbundled so that the supplier need not pay for networ& components or facilities
that it does not re%uire for the service to be providedJ , and c8 upon re%uest,
sub,ect to chares. 'overnments must ensure that the reulatory body be
transparent with respect to the procedures for interconnection neotiations and
.3
arranements.
iii8 'overnments have Ithe riht to define the &ind of universal service obliationJ,
which will be in accordance with other principles of an anti-competitive,
nondiscriminatory, transparent, neutral nature.
iv8 'overnments should uarantee the availability of licenses and should be clear with
respect to the criteria and the period of time re%uired for the application for a
license and the terms and conditions for the rantin of individual licenses.
v8 'overnments shall separate the reulatory body from any supplier of basic
telecommunications services. IThe decision of and the procedures used by
reulators shall be impartial with respect to all mar&et participants.J
vi8 'overnments shall ensure that any procedures for the allocation and use of scarce
resources will be carried out in an ob,ective, timely, transparent, and non-
discriminatory manner.
In!epen!ence of the "egulator 6o!
Chile overnments often oppose the creation of independent reulatory aencies,
private investors, forein investors, and telecom wor&ers demand autonomous reulatory
aencies to assist in the liberali#ation processes.
7+
(ndependent reulatory aencies play a
critical role, especially when overnments retain ownership in telecommunication carriers.
Autonomous reulatory bodies may prevent overnment-owned telecommunications
carriers from enain in neative monopolistic activities such as usin unfair tactics to
bloc& interconnection, nelectin networ& e-pansion, and inorin services of poor
%uality. (f reulatory aencies remain under the overnment, then effective telecom
operations will be difficult to brin about. As specified in the CTE "eference 0aper on
Dasic Telecommunications, separation of reulatory bodies from overnment is a
necessary element of the process of reulatory reform in telecommunications.
7+
0etra##ini, .55;.
.@
Transparenc
(t cannot be over-emphasi#ed that transparency is the most important and
fundamental principle in reulatory reform. Such transparency means publically &nown
and available access to all of the laws, reulations, procedures, interconnection
policies$areements and administrative rulins of eneral application respectin any
telecom matters which may affect operators. Such information must be published and$or
made available in some form by overnments. /nsurin transparency will ensure that two
important oals are accomplished. Ene, in bein aware of the relevant laws, reulations,
and interconnection policies$areements before it enaes in economic activities, firms are
able to ma&e sound, lon-term, economic efficient decisions. Second, such &nowlede on
the part of private telecom actors prevents mar&et outcomes from bein distorted.
7.

Interconnection Polic
(nterconnection policy, toether with the efficient pricin of telecom services, is a
third important component in a successful transition from monopoly to competition in the
telecommunications sector. (nterconnection policy re%uires incumbents with essential
facilities to share e-istin networ&s with new entrants on economically efficient terms by
allowin them, for e-ample, to choose amon the dominant carriersL networ& features.
Chat is also essential is that the contracts of new entrants must clearly spell out the
interconnection obliation of the dominant operators, the principles under which terms of
interconnection will be neotiated, and the process and timetable for a reulatory decision
if the parties fail to reach an areement.
77
+ctual Telecom 1iberali.ation an! Deregulation
As already discussed above, all the five sample countries listed in Table =
liberali#ed their telecommunications infrastructure services by separatin the actual
operations or activities from the reulatory function. Enly the 0hilippines also separated
the reulatory function from the policy-ma&in function. Chile four countries established
7.
!e&ete&uty, .555.
77
Cellenius, .554.
.=
a reulatory aency as an independent overnment ministry, the 0hilippines created a
semi-autonomous body for this purpose.
73

Table 7. "estructuring of 8overnment 4unctions in Telecommunications
Separation of
Eperation$"eulation
Separation of
"eulation$0olicy
Type of "eulatory
Aency
Arentina Yes >o Ministry
)hile Yes >o Ministry
Gorea Yes >o Ministry
Me-ico Yes >o Ministry
0hilippines Yes Yes Semiautonomous
So$rce! Hufbauer, et.al., .554 and )owhey, et. al., .555.
I.;RASTR"CT"R SR8ICS I. T& CARI''A.
(nfrastructure services in the )aribbean reion are heavily monopoli#ed by the
public sector. This state-monopoli#ation restricts competition in infrastructure services,
such as ports and telecommunications. The telecom industry in the )aribbean in particular
is Idominated entirely by private and overnment-owned monopolies, with the e-ception
of pain services, some fi-ed based mobile services and (nternet service providers.J
-5
)able and Cireless 6)BC8 has been a monopoly supplier of telecommunications services
in the )aribbean reion, controllin telecom services in eiht /nlish-spea&in )aribbean
countries and holdin a @5 percent sta&e in another.
-7
Aespite proloned persistent
criticism tarettin this monopoly, )BC is continuin to neotiate new licensin
areements with several )aribbean overnments.
-9
(t has been reported that one )aribbean
telecommunications minister stated earlier this year that )BC represented the Ilast
vestie of Dritish colonialismJ in the reion.
(n terms of teledensity, as Table ; reveals, the )aribbean is relatively hih
compared with 9atin American countries. Table ; shows that around @++ out of every
73
Hufbauer, et.al., .554.
7@
Dradford, .555.
7=
!inancial Times, Ectober <, .555.
7;
(bid.
.;
.+++ persons have access to a phone in Antiua and Darbuda, Darbados, and St. Gitts and
>evis, whereas there is no sinle nation in 9atin America that reaches this deree of
teledensity. En averae, the teledensity is much hiher in the )aribbean than it is in 9atin
America. However, the comparable fiure for )anada and the 1nited States is over ;++,
representin a very lare ap with the )aribbean.
74

Table 4 summari#es the CTE commitments underta&en by )aribbean countries in
the area of basic telecommunications. Enly five countries in the reion made commitments
in international telecom services and facilities and forein investment: Antiua and
Darbuda, Aominican "epublic, 'renada, ?amaica, and Trinidad and Tobao. However,
most of these commitments are for the phasin in of future liberali#ation and dereulation
of domestic telecom mar&ets, and many will become effective only after 7+.+.
7<
Therefore, there will be no immediate effect on economic restructurin or rowth as a
result of these commitments. And only five of the .7 countries in Table 4 have committed
to a future liberali#ation of forein direct investment, the most important means to
promote reater efficiency and more contestable mar&ets.
Table 9. Tele!ensit in the :estern ;emisphere, 1##<
Cari((ean Tele%ensit#- .orth America Tele%ensit# <atin America Tele%ensit#
Antiua and Darbuda @73 )anada ;+5 'uatemala @.
Darbados 34+ 1nited States ;@@ Honduras 34
Deli#e .33 >icaraua 75
Aominica 7;3
<atin America
0anama .3@
Aominican "epublic << Arentina .5. 0arauay @3
'renada 7@3 Dolivia ;5 0eru ;<
'uyana ;+ Dra#il .+4 1ruuay 737
?amaica .@+ )hile .<+ Kene#uela ..;
St. Gitts B >evis 3<7 )olombia .@<
St. Kincent B 'renadines
.4. )osta "ica .;5
Suriname .3. /cuador 4=
Trinidad B Tobao .;< /l Salvador =;
* Teledensity: 9ines$.+++ population.
So$rce! Corld Dan& and (nternational Telecommunications 1nion 6(T18

However, there is some movement towards liberali#ation in the )aribbean telecom
industry. (n the words of )hristopher Tomas, Assistant Secretary-'eneral of the
74
0rimus, .55<.
7<
Stephenson, .555.
.4
Erani#ation of American States 6EAS8, I9iberali#ation is a fact, it is onoin.J !urther,
the Corld Dan& has approved 1S2; million in financin to help reform
telecommunications in five countries of the Erani#ation of /astern )aribbean States
6E/)S8
75
. This Corld Dan& pro,ect is desined to introduce pro-competitive reforms in
the telecom sector and to enhance information-related s&ills in Aominica, 'renada, St.
Gitts and >evis, St. 9ucia, and St. Kincent and the 'renadines.
3+

Table <. 8+TS Commitments on Telecommunications b Caribbean Countries
Countr# Commitments un%er the $T/
Re6ulator#
principles
>Reference
7aper?
Satellite services
an% facilities
;orei6n
Investment
International
Services an%
;acilities
Antiua and Darbuda Yes .o Yes >200,? Yes >20*2?
Darbados .o .o .o .o
Deli#e Yes .o .o .o
Aominica Yes .o .o .o
Aominican "epublic Yes Yes Yes Yes
'renada Yes Yes >2003? Yes >200,? Yes >2003?
'uyana .o .o .o .o
?amaica Yes Yes >200,? Yes >200,? Yes >20*1?
St. Gitts B >evis .o .o .o .o
St. Kincent B 'renadines .o .o .o .o
Suriname .o .o .o .o
Trinidad B Tobao Yes Yes Yes Yes
So$rce! CTE
Accordin to the !inancial Times report of Ectober <, .555, officials in some
)aribbean islands e-pect IM.....the telecommunications mar&et to be fully liberali#ed by
the end of 7+++.J The dilemma, however, is how to achieve this ob,ective. )ountries must
deal with )BC reardin the issuin of licenses, which constitutes a considerable obstacle
at present to liberali#ation. (n fashionin their liberali#ation stratey, )aribbean
overnments must ta&e into account the se%uencin of privati#ation and competition, the
need to resolve the problem of information asymmetry, the necessity of creatin
contestable mar&et, and the creation of independent reulatory bodies, while ta&in into
75
Members of the Erani#ation of /astern )aribbean States are Antiua and Darbuda, Aominica,
'renada, St. Gitts and >evis, St. 9ucia, and St. Kincent and the 'renadines.
3+
The Corld Dan&, .55<.
.<
account mar&et si#e and consumer needs. (n desinin this stratey, )aribbean
overnments may wish to consider the reion as a whole in terms of the mar&et rather
than individual economies, and to thus appropriately coordinate their liberali#ation and
dereulation strateies.
Ence the )aribbean telecom mar&et is liberali#ed, island economies can reach hih
levels of diiti#ation in a very short time throuh modest investments and networ&
uprades, due to their relatively small si#es.
01
Such liberali#ed telecom mar&ets will
accelerate the economic rowth and development of the )aribbean economies, and ive a
particular boost to the tourism sector, in which most )aribbean countries are hihly
speciali#ed.
3.
0etra##ini, .55;.
.5
R;R.CS
Dradford, Meriel K.M. .555. (laying Catch+$p in a ,lo-al n)ironment! &$t$re
.i-eralization of Telecomm$nications $nder the WTO and Associated *eg$latory
*eform. Araft paper prepared, in collaboration with T. Gendal Hembroff, for I)onference
on 'lobal Services Trade and the AmericasJ. )osta "ica 6?uly <-58.
)owhey, 0eter and Mi&hail M. Glimen&o. .555. The WTO Agreement and
Telecomm$nication (olicy *eforms. A Araft "eport for the Corld Dan& 6March 48.
The /conomist. .555. IA Survey of TelecommunicationsJ. 6Ectober 58.
!e&ete&uty, 'e#a. .555. *eg$latory *eform and Trade .i-eralization in Ser)ices. 0aper
prepared for Ithe Corld Services )onress.J Atlanta, 'eoria 6>ovember.-38.
!inancial Times. .555. I)aribbean nations et touh with )BCJ. Corld >ews: 9atin
America B )aribbean 6Ectober <8.
NNNNNNNNN. .555. IAebate on 1S dereulation hots up.J Corld /nery: 1S Aereulation
6Aecember <8.
'alal, Ahmed, and Dharat >auriyal. .55=. *eg$lation of Telecom in De)eloping
Co$ntries! O$tcomes, /ncenti)es and Commitment. Corld Dan& 6Auust8.
Harr, ?erry. .55<. ITelecommunications in the Americas.J >orth-South (ssues, Kol. K((,
>o. .. 1niversity of Miami.
Hufbauer, 'ary )lyde and /ri&a Cada. .554. Unfinished 0$siness! Telecomm$nications
after the Ur$g$ay *o$nd. (nstitute of (nternational /conomics. Cashinton, A.).
6Aecember8.
9ow, 0atric& and Aaditya Mattoo. .55<. *eform in 0asic Telecomm$nications and the
WTO 1egotiations! The Asian 'perience. 6>ovember 7=8.
0etra##ini, Den. .55;. ,lo-al Telecom Tal2s! A Trillion Dollar Deal. /nstit$te for
/nternational conomics. Cashinton, A.). 6?une8.
NNNNNNNNN. I)ompetition in Telecoms O (mplications for 1niversal service and
/mployment.J The Corld Dan& 'roup, >ot >o. 5;, the 0ublic 0olicy for the 0rivate
Sector Series.
0rimus, Cilma. .55<. (reliminary Stat$s *eport on /nformation and Comm$nications
Technology 3/CT4 /nfrastr$ct$re in the ACS States. 0aper prepared for Ithe Secretariat of
the Association of )aribbean StatesJ 6?une8.
"oer, >eil. *ecent Trends in (ri)ate (articipation in /nfrastr$ct$re. The Corld Dan&
'roup, 0ublic 0olicy for the 0rivate Sector.
Sinh, ?.0. .55<. )al$ating Telecomm$nication (ri)atization and .i-eralization in /ndia
7+
and the &ar ast. 0aper prepared for the conference, IHas 0rivati#ation Cor&edP The
(nternational /-perience.J )olumbia (nstitute of Tele-(nformation, )olumbia 1niversity,
>ew Yor& 6?une .78.
Stephenson, Sherry M. .555. Ser)ices /ss$es in the World Trade Organization. Study
prepared for Ithe !orum Trade Ministers.J 6April 758.
Callsten, Scott. .555. An mpirical Analysis of Competition, (ri)atization, and
*eg$lation in Africa ad .atin America. Corld Dan& 6May8.
Cellenius, D,orn. .554. ITelecommunications "eform O How to Succeed.J The Corld
Dan& 'roup, >ote >o..3+. 0ublic 0olicy for the 0rivate Sector series 6Ectober8.
Corld Dan&. .55<. ICorld Dan& !inances Telecommunications reform in the /astern
)aribbean.J 0ress "elease. >ew "elease >o. 5<$.45<$9A).
7.