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PROFILE

ENGR. FARIDA ESSA

COLUMN FOR THE RECORD
SPECIAL REPORT DOMESTIC REGULATION AND DIPLOMACY IN TELECOMMUNICATIONS II 
 
PART II
DOMESTIC REGULATION AND DIPLOMACY IN TELECOMMUNICATIONS
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By YOUSAF HAROON

Mar 22 - 28, 2003
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GATS PRO-COMPETITIVE REGULATION

General Agreement on Trade and Services (GATS) WTO including the Reference paper and Annexure on Telecommunications Services provides the most important milestones to achieve desired regulatory and policy objectives, which are:

Guidelines for domestic regulation
Regulatory checks on monopoly and exclusive service suppliers
Establishment of independent regulatory authorities
Adoption of competitive safeguards to prevent anti-competitive behaviour
Measures to ensure interconnection at cost-oriented rates
Transparent and non-discriminatory licensing which is publicly available
Non-discriminatory allocation of scare resources such as frequency spectrum
Universal service obligations not being burdensome than necessary

Rules of international trade liberalization under WTO service sector reforms have provided great incentives for trade and business promotion, world over. Besides trade liberalization, the inventions and innovations in Information and Communication Technologies (ICT) specially Internet and related applications have totally given a new regulatory and business dimension to the way the legacy telecommunication business has been running. The most significant change in the market is the from "no-entry" to "restricted-entry" by ending the exclusivity of incumbent operator, moving towards "free-entry" which in an ideal sense achieves effective competition phase.

There can be two basic scenarios for the way these changes are influencing developments in the telecom markets.

Table 7: THE NEW REGULATORY AND POLICY PARADIGM

Full Competition Scenario

The Dominant Player(s) Scenario

(Idealist)

(Strategic)

Permeable seamless networks

Fragmented networks

Universal services

Reduced universality of services

Demand-led

Supply-led industry,

telecommunication industry

multinational user pressure

Open Systems, common interface standards

Weak stimuli for competition

Co-operative partnerships, transparent

Rivalry, non-transparent

network access

network access

Minimal regulation

Increasing regulation

Source: Telecom Reform

The first, as shown in table 7, above, is an Idealist scenario which envisages the emergence of full competition in the market. The second is a Strategic scenario in which an oligopolistic market structure emerges where a few dominant players vie for success in the market. The first scenario implies only a minimal role for regulatory authorities as the market performs according to the expectations of outcomes in a perfectly competitive market. The second, much more likely scenario, implies that the need for regulation will increase. However, it does not imply that regulatory measures which have been effective in the past will continue to be so in the future.

Current telecom regulation stage offers sector specific regulations by directly controlling the market entry through a telecom licensing regime both for fixed and wireless telecom markets in Pakistan. The incumbent monopoly operator, i.e., the PTCL has been provided room to adjust accordingly as the competition will take place, where PTCL remains a dominant or significant market player (SMP) in fixed line with an integrated LL and LDI licenses, until the company is sold out through a rapid privatization process. Therefore, Pakistan has opted for the 2nd strategic, dominate player scenario for the time being as of January 2004.

REGULATING TELECOM MARKET STRUCTURES

The key purpose of introducing competition into telecom market is to promote greater rivalry among firms by liberalizing telecom market structures leading to improved productivity, wider consumer choice and lower prices of telecom services. There exist two types of market structures:

 

 

i. Vertical Market Structure (upstream, infrastructure, downstream)
ii. Horizontal Market Structure (mergers and acquisitions)

Vertical telecom market structures are categorized as:

i. upstream market
ii. infrastructure market
iii. downstream market

The upstream market may also comprise of international cross-connect leased line infrastructure, fiber-optic submarine cables and space satellites, providing bulk data provision at country landing points and gateways. The infrastructure market in telecommunications is the network provision market which is formed by the incumbent network operators, Internet Service Providers (ISPs), data communication providers and mobile network providers. The downstream market comprises of retail telecom markets including pre-paid cards, public call offices (PCOs), and retail outlets.

The current regulation in telecommunication is focused towards achieving competition in infrastructure market which is dominated by incumbent operators in most of the parts of developing world. Today, the domestic telecommunications regulation provide opportunity to both foreign and local telecom operators to compete in the market, where GATS liberalizes the four (4) modes of supply i.e., commercial presence of foreign companies, movement of natural persons, consumption of telecommunication services abroad and cross-border trade of services using digital communication means.

Going back to vertical market structure, there can be five interesting cases as illustrate below in table 8:

 

 

Table 8: VERTICAL MARKET STRUCTURE CASES
MARKET STRUCTURE CASES ILLUSTRATION

i. Vertical Market Structure, where a single firm operates upstream and downstream components and the network infrastructures.

For example, PTCL Monopoly in Pakistan

ii. Vertical integration with competition in the downstream or upstream components, where in most cases, vertically integrated firm is required to provide separate accounts for its components businesses, so-called "Accounting Separation"

For example, the case of Paknet and PTCL, where the infrastructure for internet and voice is owned by single company but an accounting separation has been make where Paknet and PTCL maintain independent financial accounts respectively.

iii. Vertical separation with upstream and/or downstream competition, but the firm operating the network infrastructure does not operate in either the upstream or downstream components.

For example, the in the case of pre-paid calling card market, all the pre-paid calling card companies use the infrastructure of incumbent operator, i.e., PTCL.

iv. Joint ownership of infrastructure

For example, the case of Credit Cards, Debit Cards, and Automated Teller Machines (ATMs) which use the leased lines of PTCL in order to serve respective customers.

v. Infrastructure or facilities based-competition, where competing vertically integrated firms that may or may not be interconnected.

For example, the case of mobile phone operators owning their respective infrastructure and customers in Pakistan, which further are interconnected with each other for value-added mobile services such as SMS and MMS.

Source: Europe's Network Industries: Conflicting Priorities (Telecommunications)

COMMERCIAL DIPLOMACY IN TELECOMMUNICATIONS

Today, most of the upstream market for telecom is the telecom-equipment-manufacturing-market which is dominated mostly by North American, European and Japanese manufactures fulfilling the needs for global telecom infrastructure demand (see table 9).

Table 9(a) : WORLD TOP 10 TELECOM EQUIPMENT MANUFACTURES (2002)

MANUFACTURER
COUNTRY
RANK 2002
TURNOVER (USD MILLION)
(FROM JAN 1ST TO DEC. 31ST)

NOKIA

Finland
1
28 273

CISCO

US
2
19209

SIEMENS

Germany
3
18 542

MOTOROLA

US
4
17 474

ALCATEL

France
5
15 586

ERICSSON

Sweden
6
14 993

NEC

Japan
7
12 665

LUCENT TECHNOLOGIES

US
8
10 931

NORTEL NETWORKS

Canada
9
10 560

SAMSUNG ELECTRONICS

Japan
10
9 425

 

 



 

Table 9(b) : WORLD TELECOM EQUIPMENT MARKET (2002)
(in millions of USD)
2002
2004*

Terminals

62 452
61 411

Mobiles

41 039
41 039

Fixed

21 413
19 857

LAN equipment

61 580
59 136

WAN fixed access equipment

48 538
43 270

Narrowband switching

21 250
17 597

Broadband switching

27 288
25 673

WAN transmission equipment

13 650
9 587

WAN DATA equipment

24 855
22 340

WAN cable and fibre optic

8 480
7 406

Mobile infrastructure equipment

32 854
28 367

Services & Software

15 512
14 012

Total

267 921
244 528

Source: DigiWorld 2002

The international telecommunication equipment falls under the "goods" classification of WTO General Agreement on Trade and Tariffs (GATT), Agreement on Information Technology (ITA) Products which has been exempted from all forms of direct customs to be levied by any country. Therefore, the scope of domestic regulation under GATS mainly covers telecom infrastructure service provisioning and leaves IT goods exempted under ITA. The direct benefits of market access provision under WTO and liberalizing infrastructure markets go to the international telecom equipment manufactures and providers, which are soundly protected by tough Intellectual Property Rights (IPR) regulation under WTO Trade Related aspects of Intellectual Property (TRIPS) and umbrella of international agreements regulated by World Intellectual Property Organization (WIPO). Never-the-less, the interoperability and standardization of telecommunication equipment issues is guided by International Telecommunications Union (ITU) ITU-Technical (ITU-T), and international telecommunication market developments by ITU-Development (ITU-D) divisions respectively.

 

 

In addition to this, a number of UN-System organizations play a supporting role for promoting telecommunication markets world by under the assistance of World Bank, UNCTAD, UNDP, UNESCO by promulgating innovative jargon such as "Digital Divide", "Global Information Society", and "Information and Communication Technologies" eventually promoting global demand for telecommunications and information technology equipment. With a number of international research and development projects undertaken both for commercial and social development purposes by a number of international organizations, all propagating adoption of telecommunications as the panacea for economic underdevelopment specially to developing countries fall under the subject of Commercial Diplomacy in Telecommunications, with connotations of economic diplomacy, trade diplomacy and public diplomacy, each an independent discipline of study by itself. Diplomacy is a subject of exporting national interests beyond borders using diplomatic channels, which under globalization has become an art by itself.

The special character of commercial diplomacy is that it encompasses both private stakeholders and governments, that it addresses both private commercial interests and public policy interests, and that the outcome is arbitrated through both economic markets and political markets. Negotiations in commercial diplomacy cover business issues, policy issues, broad economic issues and political issues, as well as legal issues.

Commercial diplomacy is used vigorously by a number of countries to promote their commercial interests beyond borders, to promote and export telecommunications equipment commercially. A number of bilateral agreements among countries have explicit and implicit undertakings to promote mutual commercial interests. Most of the developing countries have to grapple with conflicting choices to choose among telecom equipment vendors, as telecommunication procurement choice can directly effect the international and commercial relations among countries. With opening up of telecommunication markets world over a number of international telecommunication deals swung from one vendor to the other depending upon the country of origin. Even in Pakistan, the procurement for network expansion for one of cellular operators eventually ended with Nortel Networks, Canada whereas, Nokia, Finland has initially won the commissioning of telecommunication equipment on merit.

To the extent the commercial vendors influence domestic regulations either by causing delay or acceleration in the domestic regulatory process availing multi-million dollar commercial opportunities in respective countries causing regulatory captures either by politicians or officials of governing regime.

TRADE DIPLOMACY IN TELECOMMUNICATIONS

Any government policy or regulation can become trade-related issue if it influences international trade or commerce. In terms of trade in services, any domestic rule or regulation which bars a foreign company to have a comfortable flexibility in doing business is seen as a barrier to trade. Therefore, regulations are seen as trade barriers and must be removed by under reciprocal market access negotiations. As, the negotiation of trade-related policy issues primarily focuses on the reconciliation of trade-based economic objectives and broader public policy objectives such as health, safety, and the social welfare of disadvantaged groups in society, such as Universal Service Obligation in telecommunication regulation enforcing both domestic and foreign telecom operators to serve rural and deprived areas of population. These different interests of society are reconciled through a complex negotiating process that takes place within and between domestic stakeholder groups such as businesses, unions, civic groups and government agencies, and ultimately between national governments. A number of foreign businesses have failed to enter into very profitable business deals in countries like Pakistan, as they fail to address the domestic needs of the political economy.

For example, Frobes International, which wanted to invest USD 800 million for a Deep-Sea Fishing Project, though initially got the consent of key government officials at the federal level, has to go empty hand from Pakistan as the provisional governments of Sindh and Balochistan vetoed the commercial idea of the project, keeping in-view high stakes of local fishermen, who not only earn their day-to-day earnings from catching fish but also provided an important pool of voters for the government at that time.

While most day-to-day negotiations between governments on international commercial issues focus on specific commercial problems created by specific policy measures, the negotiations that get the most attention are comprehensive government to government negotiations that cover a wide range of products and policy issues. Examples are bilateral free trade negotiations aimed at removing most barriers to trade and investment between countries, or the multilateral rounds of trade negotiations carried out under the auspices of the world trade negotiations. These negotiations typically address both the reduction and elimination of a wide range of trade barriers and the negotiation of trade rules. Keeping the inter-linkages of trade and commerce, some diplomacy experts take commercial diplomacy and trade diplomacy as same. These negotiations address the fundamental commercial interests mutually beneficial for party countries, failure to which can lead to a tug-of-war at any stage of these relationship.

Another example of commercial diplomacy can be the classic case of USD 800 million Hub Power Company, in Pakistan, which became the hottest debacle of foreign investment in independent private power (IPP) generation. Hubco, emerged under international sovereign guarantees by World Bank, and started operating offering abnormal tariff trades (which was then approved by then government to attract foreign investment) later was challenged by the later government on grounds of being exploitative eventually ripping off the Pakistani consumer. Although justified, the u-turn in government policy yet the whole feasibility of Hubco into jeopardy, varying off foreign investors confidence to invest in Pakistan. Eventually, after a decade long negotiations between the government, international lenders, international investors through means of commercial diplomacy resolved the issue.

The primary objective of trade diplomacy is always to achieve a balance between what you give and what you take, at the time of inter-governmental negotiations specifically in the terms of trade, by maintaining a balance between exports and imports. In reality, everyone tries to offer least and expects to get the most out of you, in multilateral trade negotiations. In such cases, trade diplomacy becomes an effective tool to counter exploitative practices under WTO trade negotiations, which happen to a number of developing countries, as developed and industrialized countries continue to demand more liberalized trade policy for their products and services, providing less than equitable market access by reciprocating. Here, effective trade diplomacy tactics can provide timely trade-gains to these developing countries if pro-actively practiced. Governments can effectively counter commercial diplomacy tactics by foreigners by using prudent trade diplomacy strategy for achieving national interests by binding foreign imports of telecommunication equipment and allowing commercial presence to foreign companies with trade strategy of reciprocity to achieve maximum market access of indigenous domestic goods and services to that country. There are a million examples of developed countries exploiting the developing in terms of trade.

A more blunt example of trade diplomacy of Pakistan buying telecommunication exchanges from France, when French government conditioned the delivery of Mirage fighter air-jets, with purchase of French telecommunication equipment, back in mid 1980-90s as complained by a senior ex-office bearer of Ericsson, Sweden, which was supposed to execute the provisioning of telecommunication exchanges, initially to a senior official of incumbent operator in Pakistan when the officer went for official training to Sweden in 2003.

Under the multilateral negotiations of WTO Rounds and Ministerial Meetings, such as Doha Round (2002) and Cancun Ministerial Meeting (2003) governments have to negotiate over a number of critical issues of national importance from A-to-Z e.g., agriculture subsidies, balance of payment restrictions, competition issues, customer tariffs, domestic regulation, investment barriers, movement of natural persons etc. Trade diplomacy can provide necessary benefits to developing countries like India and Pakistan, if tactfully practiced linking the national trade strategy with telecommunication liberalization process. If Pakistan has to achieve export-let economic growth, then there is a need that Pakistan prudently exploits both its trade and commercial relations in the broader long term national interest of the country by ensuring transfer of advance technology, relocation and investment in industrialization process like China has been able to do, to eventually achieve economic self-sufficiency and industrial competitiveness.

 

 

ABOUT THE AUTHOR

Mr. Yousaf Haroon is working as Assistant Professor at Institute of Communication Technologies (formerly National Post Graduate Institute of Telecommunications and Informatics) Islamabad Pakistan. He teaches telecommunication business management, business policy, strategy and competitiveness. He received advance international telecom management and international telecom policy training from Sweden, besides an international certification in Intellectual Property Rights (IPR) from WIPO. He is associated with a number of national and international organizations such an advisor (Information & Communication Technologies) Development Gateway, World Bank, expert on GATS with World Trade Review, advisor ITU regulatory forum GREX etc. His areas of research are commercial and trade diplomacy, international telecom markets, organizational leadership, human resource management under change and technology management. Currently, he is working on his book "Global Trade Agenda for Regulation, Market Access for Competition: Liberalizing Telecom Markets under GATS". He can be reached via email: prof_haroon@npgiti.edu.pk or emailharoon@yahoo.com Tel: +92-51-4430247.