DOMESTIC REGULATION AND DIPLOMACY IN TELECOMMUNICATIONS
Domestic regulation becomes an important tool to ensure level-playing field for both domestic and foreign players
By YOUSAF HAROON
Mar 15 - 21, 2004
THE REGULATORY PARADIGM
As the economic wisdom evolved, keeping in-view the experience of pro-socialist USSR and pro-capitalist USA, after the fall of USSR it became obvious that governments alone cannot afford to provide welfare for all in an equal manner by public means alone. While providing public-welfare, rather the role of governments is to ensure the delivery of social-welfare through a mix of public-private partnerships, as legitimatized under pro-capitalist economic policy, which may lead to social-welfare as well as economic growth at the same token. While the experimentation of economic wizardry continued for decades, in the late 1970s, it was felt that even a mix of public-private partnership is insufficient due to the government stake in various sectors of business, which again create an anomaly for economic efficiencies to take place.
With the phenomenon of globalization, driven by Internet technologies of early 1990s, capital market integration, trade liberalization and privatization gave new insights for economic policy-making specially under WTO, which demanded that the role of governments is to ensure public welfare through means of regulation, and to provide market access for both domestic and foreign competition to deliver products and services in a competitive manner, by offering competitive prices and more choice driven by the motivation to innovate and earn efficiently. With removal of market access restrictions under WTO agenda, the regulatory debate has become more complex with conflicting priorities to implement either sector specific regulation or general competition rules. Keeping in-view of meeting public policy goals, a number of countries has adopted suitable regulatory models for regulation in telecommunication service provision i.e., New Zealand adopting general competition rules, Pakistan opting sector specific regulatory model, and India using a hybrid regulatory model having both sector specific national regulatory authorities and competition bill in place. The choice of selecting a regulatory model to some extent is linked with the state of economy and existing market structure of telecommunications of a particular country.
From a bipolar world as the world has entered into a uni-polar world, the realities of doing business and role of governments has changed significantly under the global agenda for market access under the multilateral framework of WTO and US as the only global economic super-power. As powerful economic and industrial countries want more market access to global consumption economies, the doctrine of economic welfare has become pro-competitive and pro-regulatory. Therefore, it is important for the governments to understand the old and new regulatory paradigms in the era of emerging telecommunication technologies, converging markets and trade liberalization as elaborated in the table 1 below:
Table 1: STAGES OF TELECOMMUNICATION LIBERALIZATION
(Case of Pakistan)
Description of Liberalization Process
Government as sole telecom service provider
Pakistan Telephone & Telegraph (T&T) Department
Government owned-private entity as sole telecom service provider
Pakistan Telecommunication Corporation (PTC)
Exclusivity for Monopoly (in basic telecom services as per WTO accords)
* Establishment of the national regulatory framework
* Partly Government owned-privatized sole telecom service provider
* Pakistan Deregulation Ordinance 1996
* Pakistan Telecom Authority (PTA)
* Pakistan Telecommunication Company Limited (PTCL) with 12% public holding in Karachi Stock Market
Call for Competition
Domestic market opens for local loop (LL) and long distance international (LDI)
Pakistan Telecommunication Policy 2003
Today, the process of liberalization has also been linked with efforts to introduce harmonized regulatory principles in countries in order to ensure consistent market entry opportunities for telecommunications operators especially of foreign origin, in order to promote trade in services under WTO General Agreement on Trade and Services (GATS) agenda. Therefore, domestic regulation becomes an important tool to ensure level-playing field for both domestic and foreign players.
Telecommunications networks form what might be thought as a country's nervous system. No country can develop and progress in the absence of this nervous system. The primary rationale adduced by governments to regulate telecommunications was that "because of the high infrastructure costs, network harmonization requirements and the obligation to provide universal service, telecommunication is a natural monopoly", which eventually abuses the market and exploits the consumers by offering no or very little value added services without much innovation. This very reason put telecom services in the basket of public utilities. These public utilities serve the core objective of government, and that was to provide the public welfare which is a cumulative basket of basic needs such as access to basic health care, employment, food, water, shelter, education and communications as adopted by UN charter, besides ensuring social equality, freedom of speech, access to justice, and equal opportunity.
Concomitant with the rise in economic growth, regulatory agencies started emerging in the late 19th and early 20th century. The existing institutions of political power of the 19th century — the courts and the political parties — were deemed incapable of handling the instability, complexity and conflicts generated by the corporate economy. The oldest of the theories regarding government regulation of business is the so-called public interest theory. The theory essentially holds that the function of public utility regulation is to provide safeguards for the consumer against the potential or actual abuses of monopoly power. Regulations may now be generally divided in three main categories:
a) Economic regulation,
b) Social regulation, and
c) Antitrust regulation.
Economic regulation (or direct regulation) regulates price, and quantity of the commodity/services, and entry into and exit out of the market. Economic regulation is industry-specific, that is, it applies to the activities of a single industry. Social regulation is designed to promote health, safety, and the protection of the environment. The term "social regulation" is used to reflect the broad social objectives embodied in such regulation.
Most of the social regulation can be grouped into four categories:
(i) health and safety, which includes regulations pertaining to consumer product safety, transportation safety, occupational health and safety, pure food and drug, fire protection, etc.;
(ii) environmental regulation, includes regulations pertaining to control of air and water pollution, land use regulation, etc.;
(iii) "fairness" regulation, refers to protection against fraud, deception or inaccuracy in the reporting of information and includes all consumer protection and anti-discrimination legislation; and
(iv) "Cultural" regulation, that is, regulation to protect culture: for example, Quebec's legislation pertaining to display of signs in French.
Antitrust regulations are aimed at preventing abuse of market power and anticompetitive practices.
Over the years telecommunications was thought to be a natural monopoly which provide the fundamental rationale to regulate telecommunications, whereas, telecommunications had so close substitutes for long until the advent of internet and IP-related technologies happened causing:
* wasteful duplication of facilities
* uneconomic entry
* digital divide or inability to meet universal service obligations (USO)
* market abuse using "significant market power" rather "all market power" tactics including price-skimming, predatory pricing etc
* poor quality of service (QoS)
* economic inefficiencies such as very high cost of service delivery due to bureaucratic or political influence
Keeping the complexity of multifarious task of telecommunication regulation, the whole process has today been institutionalized by establishing telecom regulators to ensure fair and transparent competition to achieve necessary public policy imperatives.
INSTITUTIONALIZING TELECOMMUNICATION REGULATION
In the late 1980s, as telecommunications market liberalisation developed, many governments started to introduce new regulatory systems that were more suitable for a competitive telecommunications market. In particular, the first key requirement was to develop a regulatory institution separate from all interested commercial parties in order to ensure fair competition among all market participants.
There are two ways to achieve the separation of a regulatory body from interested parties. One is full privatisation of the incumbent. By privatisation, the Ministry can be neutral when regulating the industry because it does not have a relationship with any specific market participant. The second way is to establish a telecommunications regulator that not only is separate from the industry but also maintains a distance from the Ministry or other government bodies that remain as a major shareholder of the incumbent. Most of the OECD countries as well Pakistan opted for the second option of establishing an independent regulatory regime to ensure that conflict of interest must not take place as the regulator promotes competition.
The trend in establishing an independent regulator has been accelerated by the WTO agreement on basic telecommunications services that was signed on 15 February 1997 and came into effect on 5 February 1998 (the Fourth Protocol). The Reference Paper to the WTO agreement on basic telecommunications services contains many important pro-competitive regulatory principles, which apply to signatories of the agreement. In the WTO Reference Paper, one article refers to the nature of the regulatory body. Under the title of "independent regulators", the Reference Paper states (19):
"The regulatory body is separate from, and not accountable to, any supplier of basic telecommunications services. The decisions of and the procedures used by regulators shall be impartial with respect to all market participants".
This principle is linked to that of non-discrimination, that is, the regulatory body should not have any relationship with any telecommunication operators and it should be fair to all market players. However, in spite of the reference to "independent regulators", the principle does not impose on the signatories any specific administrative structure for regulation. Therefore, as long as a Ministry has no direct relationship with an operator, even the Ministry can be considered as an "independent regulator" under the WTO agreement on basic telecommunications services.
For example, while Japan and Korea adopted the Reference Paper as a part of their WTO commitments, they still have Ministries as regulator, where as in Pakistan the regulator is a national regulatory authority independent of Ministry of IT (IT and Telecom Division) which is responsible for the telecom policy formulation, to be finally approved by the national assembly.
Furthermore, each country's regulatory structure should be understood in the context of its economic, social and political background where the regulatory institutions in the telecommunications sector as follows, country-wise illustrated in Table 2:
MINISTRY — a government agency that is responsible for policy making in the telecommunications sector.
INDEPENDENT REGULATOR — a sector specific independent regulator that is separate from the Ministry as well as telecommunications operators.
TELECOMMUNICATIONS REGULATOR — a regulatory body that is responsible for the supervision of telecommunication regulations. This can be either the independent regulator or the Ministry, where there is no independent regulator in the telecommunications sector, or regulatory functions may be shared between both bodies.
COMPETITION AUTHORITY — a regulatory body that is responsible for the supervision of general competition rules.
Table 2: REGULATORY INSTITUTIONS IN THE TELECOMMUNICATIONS SECTOR
Australian Communications Authority (ACA),
Australian Competition and Consumer Commission (ACCC)
Department of Communications and the Arts
Telecom Control (TKC)
Federal Ministry for Science and Transport
Belgian Institute for Postal Service and Telecommunications (BIPT)
Ministry of Telecommunications
Canadian Radio-television and Telecommunications Commission (CRTC)
Regulatory Authority for Telecommunications and Posts
Federal Ministry of Economics and Technology
Telecom Regulatory Authority of India (TRAI) is semi-independent body which advises Ministry of Communication and IT (MCIT)
Ministry of Communication and IT (MCIT)
Ministry of Posts and Telecom (MPT)
Ministry of Posts and Telecom (MPT)
Korea Communications Commission (KCC) as a semi-independent body within the Ministry of Information and Communication (MIC)
Ministry of Information and Communication (MIC)
National Telecommunication Authority
Ministry of Information and Communication
Commerce Commission : competition authority
Ministry of Commerce
Pakistan Telecommunication Authority (PTA)
Ministry of IT (MoIT)
Telecommunications Regulatory Commission of Sri Lanka
Ministry of Mass Communication
Ministry of Post and Telecommunications
Ministry of Post and Telecommunications
Tanzania Communication Regulatory Authority (TCRA)
Ministry of Communication and Tranport
Ministry of Transport and Communications
Ministry of Transport and Communications
Office of Communications (OFCOM)
Department of Trade and Industry
Federal Communications Commission (FCC)
FCC and National Telecommunications and Information Administration (NTIA) of the Department of Commerce
Source: OECD and Blekinge Institute of Technology, Sweden
Note: Shaded countries have Ministry, both as a Regulator and the Policy Maker
Realizing the importance and far flung economic benefits of independent regulatory institutions, more than 150 countries have either introduced new telecommunication legislation, or modified existing regulations, since 1990s. New regulatory legislations have been accompanied by a new sector specific national regulatory authority. By the end of 1999, there were about 85 separate regulatory bodies for telecommunication worldwide, which by the end of 200 1increased to 112. By the mid of 2003, there were 123 independent regulatory bodies worldwide, shaping the future of global telecommunication services and markets for competition. Although the degree of independence and responsibility of the regulator vary from country to country yet, the performance of a regulatory system largely depends on the regulator's determination to promote competition regardless of the form of the institutional structure.
TELECOMMUNICATION DE-REGULATION PHENOMENON
The traces of the deregulatory movement can be found in the dissatisfaction of people and business with the performance of regulatory agencies and with the direct and indirect costs of complying with regulations leading to a regulatory failure as illustrated in Table 3, hence:
As economic regulation is born of market failure... paradoxically deregulation is born of regulatory failure!
Table 3: DEREGULATORY WISDOM: FACING REGULATORY FAILURE
Inefficient Regulatory Agencies
Political Influences, Regulatory Captures, Expensive provision of Justice, Decisional Delays, Consumer Interest vs. Corporate Interest
High Regulatory Costs
Direct Costs of huge staff and bureaucracy, operations, and file work
i.e., In 1995 the United States federal government spent an estimated $16 billion to run its regulatory agencies -10 times what it spent in 1970
1. Cost of doing business such as license fees etc.
2. cost of dealing with regulatory agencies
3. fees for lawyers and expert witnesses
4. cost of complying with the regulatory decisions
5. costs of record keeping and the provision of information
Source: William Melody, Telecom Reform
Keeping in view the regulatory failure in the longer run, some countries have included an innovative "Sunset Clause" in the telecommunication regulation legislature, which ensures once the regulatory objectives of fair trade practices and general competition levels are met, the burden of regulation shifts automatically from sector specific regulator to general competition regulatory authority.
Deregulation remains quite a mis-understood phenomenon as different countries are at the different stages of economic growth and regulatory experience. Therefore, those counties which had a number of years of experience in regulation face some fundamental difficulties developed due to a various factors such as UK or US mainly due to regulatory inefficiencies and very high regulatory costs (see table 4). Whereas, most developing countries like Pakistan which have newly regulated telecommunications often mistake deregulation as re-regulation. Deregulation in the telecommunications industry further finds support in the changed market structure owing to technological developments.
Table 4: US EXPERIENCE: COST OF DOING BUSINESS UNDER TELECOM REGULATION LAVISH REGULATORY COMPLIANCE COSTS FOR TELECOM INDUSTRY
In the United States, for example, some estimate that it costs business and the country as a whole $500 billion a year to comply with federal regulations. The cost imposed on individuals and firms to comply with regulations can be divided into several categories. First, the cost of dealing with regulatory agencies. This includes fees for lawyers and expert witnesses, lobbying, preparing background material for submission, and the time of individual executives. Lobbying costs are incurred to influence the agency in its standard setting decisions or rate increases. Second, the cost of complying with the regulatory decisions. In the case of direct regulation, this includes the costs of implementing rate schedules and conditions appurtenant thereto. Third, the costs of record keeping and the provision of information to demonstrate compliance with regulations.
Realizing the compliance costs that regulations place on businesses and individuals, in 1995 the Republican-controlled US Congress decided to radically reform the manner in which rules and regulations are created and implemented. The Regulatory Reform initiative was evidence of the Republican party's "desire to reduce red tape and government micromanagement of business activities and decision making processes that are best handled by corporate management."
To reform the regulatory process, the Republicans entered into the much celebrated "Contract With America." The advocates of regulatory reform claimed that excessive intervention of government in an ever-increasing array of businesses "ham-strung the private sector; stunted economic growth;" and made American companies less competitive in the global marketplace. To counter this increased government intervention, the Republican's proposed to important steps. Firstly, a moratorium on any new federal rules unless Congress approves permanent reform of the regulatory process. Secondly, they required that federal agencies conduct extensive risk assessment of new regulations before implementing them. For example, any proposed regulation that would cost industry more than $25 million in compliance cost would be subjected to an extensive cost-benefit analysis to determine if it should be issued.
Source: Joseph Wilson, CRSI McGill
One of the principal failures of policy and regulation in telecommunications can be summarised as "regulatory capture". In this situation, the regulator or operators losses (or never had) the independence to make professional decisions on their merits because of undue influence either from politicians or the regulated monopolies.
International experience, especially from OECD countries tells us that if the regulatory authority is under a continuous political or bureaucratic interference to under take important regulatory decisions, then the regulator in the real sense becomes ineffective to deliver the desired goals as in the case of US and Canada where regulators have openly spoken of their inability to regulate independently.
In developing countries, though the phenomenon of telecom regulation is quite new, there are a number of examples, where the incumbent operators have been very influential in moulding the decisions of the regulatory authority because of its old bureaucratic legacy, as in the case of Angola, Tanzania, Eypt, India, Sri Lanka and to the extent Pakistan. Its also been observed, when liberalisation and competition policies are introduced in an environment of inherited monopoly and weak regulation, competitive market forces are likely to play an extremely modest role. The experience with competition in regulated industries generally shows a strong tendency for both politicians and regulators to prefer selecting and managing competitors than promoting an open competitive marketplace, thereby creating a comfortably closed market for the chosen "competitors", not the open one intended by competition policies. This tends to lead to duopoly/oligopoly behaviour and the establishment of very high artificial barriers to entry for any new players.
There is a very fine line between the regulatory capture and regulatory independence in real situations which make this phenomenon quite complex to understand keeping in view the paucity of technical expertise and manpower with the regulator. In most countries, the incumbent operator has been the only source of providing technical savvy and manpower, as been the only organization in the country having in depth experience of this technology-driven and ever-challenging field of telecommunications. Hence, there can be a number of factors which may cause a situation similar to regulatory capture, which can be illustrated looking at the classic case of Pakistan as below in table 5:
Table 5: UNAVOIDABLE CAPTURE OR INTELLECTUAL CAPITAL INFLUENCE OF INCUMBENT OPERATOR IN PAKISTAN:
WHERE DOMESTIC TELECOM KNOWLEDGE IS SCARCE, NOT WITH INCUMBENT'S TECHNO-MANGERS
Pakistan Telecommunication Authority (PTA), being the sector specific regulator in Pakistan has evolved under a number of ministries in a short span, since its inception in 1996. PTA has travelled through time, serving under Ministry of Science and Technology, Ministry of Information Technology and Telecommunication, and now under the Cabinet Division. Similarly, the key top slots in PTA have been occupied by the officials working for the incumbent including, the functional department heads, which mostly are from the incumbent operator in finance and technical. This unavoidable regulatory capture by incumbent officials is due the fact that PTCL remains the only organization having telecommunication market savvy and management expertise in Pakistan. Therefore, incumbent operator's key personnel have become the best choice to join top-ranks both with the regulator and the ministry. Therefore, policy making and regulation is influenced by incumbent's seasoned technocrats who have local business savvy and extensive international exposure to their credit. Even, the current policy making body, the IT and Telecom Division, Ministry of IT is headed by the ex-official of incumbent operator, under whose supervision Government of Pakistan promulgated both the Fixed Telecom Policy and Mobile Telecom Policy in 2003. With the ongoing telecom policy debate on "One country one rate regime" promulgated, skeptics are pointing the hidden objectives of the telecom policy to support the incumbent operator.
With the debate on convergence issues, between telecom and broadcasting in the wake of new Information Society, the key portfolio of chairmanship of the regulatory authority on electronic media is again held by the ex-official of incumbent operator. As the developments towards future Information Society become more heated, it is anticipated that the future of regulation of information convergence will be spearheaded by again the experienced techno-managers of incumbent operator, as Pakistan faces a grave shortage of communication experts and managers, for years to come, those who understand the dynamics of doing business in telecom age of information revolution!
DOMESTIC REGULATORY MATRIX
Usually the debate on regulating telecommunication narrow downs to the telecommunication sector-specific regulation and the role of sector-specific regulator. Looking at the broader perspective of regulating telecommunication include a number of other vertical and horizontal contemporary regulatory agencies/authorities without which a conducive environment for regulating and doing telecommunication business is not possible. In Pakistan these agencies include the following as illustrated in table 6, below:
Table 6: REGULATORY AGENCIES AFFECTING TELECOM BUSINESS
REQUIREMENT FOR DOING TELECOM BUSINESS
CONCERNED REGULATORY AUTHORITY
Frequency Allocation Board (under PTA with independent members)
Wireless Telecom Operators have to allot and use spectrum under the FAB rules and regulations. Recently, FAB has deployed "National Frequency Management and Monitoring System" (NFMMS) under World Bank project which completed in December 2003. In the same month, MoIT has promulgated the Mobile Telecom Policy where PTA has called LOI for (2) more mobile licenses in addition to four (4) licenses to existing mobile operators in the country.
Electronic Media and digital content
Pakistan Electronic Media Regulatory Authority (PEMRA)
With convergence in broadcasting and telecommunications, the delivery of content regulation through electronic means comes under the legal framework of PEMRA e.g., spectrum allocation, MMS over mobile, Cable TV etc as both wire and wireless mediums are capable of delivering content through electronic means.. Until 2004, not much has been done by PEMRA to regulate the current business practice or to prepare itself for the future challenges of future Information Society.
Power-line Communications (PLC)
National Electricity and Power Regulatory Authority (NEPRA) and Private Power Infrastructure Board (PPIB)
Though responsible for regulating the generation and distribution of electric power, NEPRA is quite unaware of the new developments in future telecommunications developments, where PLC is becoming another commercial alternate for accessing telecommunications.
General Competition Rules
Monopoly Control Authority
Though MCA acts as a general competition authority, in MCA Ordinance 2002 the sector specific regulators have been provide exclusivity to ensure fair market structures by limited the role of MCA.
Investing in domestic industry, repatriation of profits abroad, and direct foreign investment
State Bank of Pakistan
Controls and monitors the money supply by regulating domestic banking and finance industry with-in the country specially repatriation of profits earned by foreign firms, foreign direct investment, portfolio investment, foreign exchange reserves and balance of payments.
WTO trade liberalization process also includes balance of payment restrictions which may encourage or hinder investment and flow of funds in the telecommunication business.
Commercial Presence as listed company in Pakistan
Securities and Exchange Commission of Pakistan
SEC regulates capital markets. With the incumbent operator i.e., PTCL is a publicly listed company, it has to conform all the necessary obligations under the SECP regulations such as corporate governance, auditing procedures, financial reporting, modes of debt and equity financing or venture capital etc.
Central Board of Revenue
Every commercial entity has to make a tax contribution under the CBR rules and regulations
Investment in Telecommunication
Board of Investment
Government of Pakistan regulates the commercial presence of foreign firms working in the country by regulating ownership rights, repatriation of profits, number of branches and movement of natural persons in the telecom sector.
Right of Way
Local Development Authorities, National Highway Authority, Railway, WAPDA
In the case of seeking NOC for "Right of Way" for deploying physical infrastructure and cables, specially in the case of LL and LDI operators have to abide by the rules and regulations of the concerned agencies
Movement of Natural Persons (foreigners working in Pakistan)
Directorate of Immigration and Passports
Government may allow or restrict the number or level of foreigners to work for a foreign telecom company in Pakistan, keeping in view of current geo-political situation.
Recruiting qualified Human Resource
Higher Education Commission
Telecom operators when look for qualified and accredited human resource, HEC rules and regulation will be an important factor to acknowledge the qualification of concerned employees or future employees.
Islamization of Economy
Commission for Islamization of Economy
In FY2001-2002, Government of Pakistan has officially adopted Islamic modes of banking and finance, which may hinder non-Islamic financial instruments and banking transactions, which the foreign investor or operator is accustomed to.
Domestic Judicial Courts
At the moment, PTA does not provide any robust mechanism for dispute resolution which is going to be the need-for-hour in telecommunication competitive market, unlike available in may countries including India.
The only arbitration methodology is provided seeking the normal course of civil or criminal courts, which is quite cumbersome and delaying.
Intellectual Property Rights (including patents, copyrights, trademarks, geographic indications and industrial designs)
National Patent Office and Judicial Courts
IPR is one of the weakest areas of Pakistan's economy. International and domestic well-know brands may see this area as one of the potential risks of doing business in Pakistan.
Special and National Security Agencies
With current geo-political situation, and past experience of doing business in Pakistan, the national security issue remains the most problematic issue for existing telecom operators.
Electronic Transactions (such as electronic commerce, mobile-banking and electronic government)
This is unfortunate that Pakistan yet has to be a member of the information society club, as Pakistan lacks the regulatory and legal framework for electronic means of doing business.
Electronic Government Directorate, IT and Telecom Division of the Ministry of IT and State Bank of Pakistan are working the modalities but still a number of issues remain in grey area.
Information Security, Cyber and Electronic Crime
Federal Investigation Agency, IT Security Task Force & Concerned Authorities
With rapid developments in telecommunications capability to provide value added and data-centric services over digital networks, still these issues remain unattended by the telecom regulator.
Recently, Ministry of IT has promulgated the draft Electronic Transaction Ordinance 2003 which will cover the modalities of electronic and cyber crime.
A telecom operator actually has to abide by the law of land, which is a basket of domestic regulation, market potential and profitability prospects, providing necessary incentives for doing business any particular country and Pakistan in specific.
TO BE CONTINUED