Telecom for improving investment climate & ICT use

Rohan Samarajiva, Public Interest Program Unit, Ministry of Economic Reform, Science & TechnologySamarajiva@lirne.net; +94 1 247 8733

Purpose of presentation

Reform of telecom is a necessary condition for investment overall

Creating conditions for private investment in telecom Market entry Independent & effective regulation

Examples from Sri Lanka throughout

Sri Lanka’s telecom sector after 12 years of reforms Multiple operators (70+)

3 national fixed (no waiters in urban areas) 4 national mobile (overtook fixed; real price

declined) 5+ facilities-based data 30 external gateway (~66% decrease in price) 20+ non-facilities based data

Fixed teledensity < 1 in 1991 almost 5 in 2003; Mobile ~0.01 in 1991 5 < in 2003

Telecom & banking are fastest growing sectors in economy in 2003 (~16%)

Telecom no longer a barrier to investment

Telecom as a necessary condition for increased investment

Two solutions Improve service only in enclave Improve sector performance everywhere

Sri Lanka tried the enclave solution in 1980s Supplementing exchange & outside plant in

Katunayake EPZ Giving priority to GCEC factories (investors) Poor results including ridiculous outcome of

banning automatic rediallers

Investment in telecom sector overall is key . . .

What we want is Adequate supply of services Lower prices Higher quality More choice

How do we get it? Not another reform of the failed government

monopoly Not regulation, per se More investment

Private investment to improve telecom

Telecom is the infrastructure with the most dynamic industry structures and technologies Integrated government monopolies lack

nimbleness to play No multilateral/bilateral assistance for

unreformed monopolies Public investments better used

elsewhere

Government action to attract private investment in telecom

Greater private investment depends on positive answers to 2 questions Are the returns adequate? (market risk) Are safeguards against administrative

expropriation adequate? (regulatory risk) What can government do?

Let investors look after market risk: no market-position guarantees

Reduce regulatory risk

Government actions: Market entry & privatization

Minimize barriers to entry; SL policy is License only where scarce resources are

involved Otherwise authorizations

Examples External gateway operator licenses

30 given since March 2003 No discretion; no numerical limits

Entry conditions compared

One-time fee (USD)

Annual fees

Bank guarantee

India 5,200,000 15% of gross rev.

Very high

Pakistan 500,000 <0.5% gr. rev. + acc. contr.

USD 10 million

Sri Lanka 50,000 0.3% of gr. rev.

None to govt.

Results . . . From unstable

monopoly to open entry . . .

From SLR 75 a minute to 20-25 . . .

Telecom no longer seen as barrier to BPO investments

Fixed Telephony Investments (SLR m)

(5,000.00)

-

5,000.00

10,000.00

15,000.00

20,000.00

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

Lanka bell

Suntel

SLTL

Incumbent GovernmentOwned; No Competition

Incumbent PartiallyPrivatized; Foreign Management; Competition

Fixed telephony investments in Sri Lanka, 1992-2002

Implications for the exchequer Before the reforms, telecom was an easy but small

source of government revenue Very low rates for domestic (<40% revenues); high

rates on international outgoing and termination (60<% revenues)

Periodic levies After the reforms, it is an easy, reliable and LARGER

source of government revenue ~20% tax (VAT; BTT earlier); reliable

On a user base that has increased seven fold Equity sales; licensing; spectrum fees; contributions

to Vishva Grama Fund (for rural rollout) Dividends from shareholding

Key reform events 1989-1994

Licensing of 15+ facilities-based operators, including Incumbent which was changed to corporation

1996 Licensing of two fixed competitors (USD 120 m)

1997 35% sale of Incumbent to NTT of Japan for USD

225 million with 5-year management agreement

Key reform events 1998

Active regulation starts First step of 5 year rate rebalancing Satellite gateways liberalized

1999 Incumbent found to be in violation of

license condition and pays consumers US$ 1 million

First public hearing conducted

Key reform events 2002

Government sells 12.5% of Incumbent’s equity, bringing government ownership to <50%

2003 30+ External Gateway Licenses issued New Interconnection Rules gazetted Implementation ongoing Already a commitment of USD 90 million

additional investment

Government actions: Regulation

Reduce regulatory risk Poor countries are poor because

Government does not work well regulatory risk is high investments are low/skewed infrastructure is inadequate economy is hobbled

Solution: independent and effective regulatory agency

Characteristics of effective regulation

No interference by government/incumbent Constrained discretion Professional and competent staff Transparent participatory processes Expeditious decision making Efforts to reduce adversarial modes;

increase buy-in Doing a few things well

Independence of regulatory agency

Information & Communication Commission that will replace TRC Members appointed with concurrence of

Constitutional Council Accountable to/removable by Parliament Not reporting to Minister for Telecom

Constrained discretion

Rate rebalancing in 1998-2003 governed by legal agreement that set revenue requirements Regulator decided specific tariffs that

would yield promised revenues

Telecom regulation should focus on

Interconnection & anti-competitive issues In Sri Lanka

New interconnection rules in March 2003 Including access to undersea cable station Implementation in process

Dominant position rules being framed New legislation will remove tariff regulation

from non-dominant operators Anti-competitive practices proceedings soon

Regulation should focus on Efficient management of scarce

resources (spectrum, rights of way and numbers) In Sri Lanka

Allocation & assignments made public 1800 MHz, CDMA & WiFi consultations First frequency auction in May 2003 New legislation on rights of way including

“final offer” arbitration New numbering plan being implemented

. . . And get out of unnecessary areas

Most retail tariffs unregulated in new Act (except of dominant operators)

Equipment approvals power replaced by Mutual Recognition approach

Consumer issues to be covered by consumer contracts Regulator intervenes only when contract

provisions exhausted

SAARC countries 1995-2001 telecom performance

F/100 CAGR M/100 CAGR

B’desh 0.43 12 0.4 143.4

Bhutan 2.54 22.3 - -

India 3.75 21.5 0.63 109.2

M’dives 9.94 11.9 6.89 -

Nepal 1.31 23.6 0.08 -

Pakistan 2.33 8 0.56 64.5

SL 4.43 26.1 3.56 53.4