creating an independent regulatory framework in an imperfect world rohan samarajiva lirneasia, sri...
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Creating an independent regulatory framework in an imperfect world
Rohan Samarajiva
LIRNEasia, Sri [email protected]
Purpose of presentation
Identify key challenges in establishing an independent regulatory framework and
Provide practical guidance on regulatory design, drawing on Speaker’s experience in regulatory
design and implementation, and International best practice
Why independent regulation? Not truly relevant if entire ICT
infrastructure is supplied by a single, integrated, government-owned monopoly E.g., Bhutan (but independent regulator
created in 2000 because of intention to allow some private participation)
Pre-requisites are Industry unbundling Private participation allowed or planned
The problem of expropriation If you want private investment, you have to
provide assurance investment will not be expropriated If risk is very high, no investment If high, skewed toward the short-term and high
returns; also high cost of capital yields sub-optimal performance along dimensions of Connectivity Price/quality Choice
Expropriation: outright & administrative
Nationalization is no longer a significant problem Treaties, arbitration, insurance as
remedies Administrative expropriation = being
nibbled to death, e.g., Promised, legitimate price increases are
not given, or delayed Compelled to buy from Minister’s
brother-in-law’s firm at a premium
Administrative expropriation Administrative expropriation = being
prevented from making a reasonable return on investment per expectation at point of investing, usually through a series of actions (not decisive when each taken alone), resulting in de facto expropriation of the investment
Not necessarily telecom specific; can be through tax laws, customs authorities, etc.
Any government can engage in admin expropriation, directly or through proxies
What’s the special concern re developing countries?
Scandinavia, Australia, New Zealand achieved excellent telecom performance without formal regulation, independent or otherwise
Japan, Chile, and Israel do not have independent regulatory authorities, but have shown good performance
Even Singapore’s IDA is not truly independent, but was seen as model
What’s the special concern re developing countries? Concern is that developing country
governments are more likely to engage in expropriatory behavior
Even if not true, perception exists; has to be addressed
Especially after April 2000, private investment in telecom has declined; sellers’ market in investment requires actions to change perception/reduce risk
Independent regulation as a response to investor concern: independence is a means, not the end
Telecom Investment in Developing Countries (USD bn)
0
10
20
30
40
50
60
70
1993 1994 1995 1996 1997 1998 1999 2000 2001
Inve
stm
ents
(USD
bill
ion)
What is so special about ICT infrastructure?
Investment in any area of economy requires safeguards against administrative expropriation Insulation of administrative officials from day-to-
day interference by politicians Constrained discretion, supervised by some form
of judicial body Adherence to rules of natural justice or due
process Protection from procrastination and
incompetence
What is special about ICT infrastructure? Investments in infrastructure industries
have long gestation periods, radically diminishing the power positions of investors after investment has been made
Previously/currently government-owned incumbent telcos have motive and capability to expropriate, as private investors in many countries have learned through bitter experience Interconnection is an especially good
expropriation mechanism
Practical actions to establish independent regulatory framework
Proper market design at point of reform Second or third best solutions cannot be ruled
out Preset regulatory framework, reducing
discretion as much as possible Provide for competent and adequately
endowed regulatory agency Get proper leadership and staff
Confident, competent, courageous, communicative, committed
Practical actions to establish independent regulatory framework
Proper market design at point of reform Second or third best solutions cannot be ruled
out Preset regulatory framework, reducing
discretion as much as possible Provide for competent and adequately
endowed regulatory agency Get proper leadership and staff
Confident, competent, courageous, communicative, committed
Competition wherever possible; regulation where necessary Remove/reduce entry/exit barriers as
much as possible Unbundle integrated monopolies Allow market entry in as many areas as
possible
Remedy problems caused by essential facilities and nodes of market power
Establish access regimes Regulate to make competition possible
Competition wherever possible; regulation where necessary Safeguard consumer through use of market
forces Address information asymmetries and anti-
competitive behavior if necessary May include price and quality regulation where
monopolies/tight oligopolies persist But innovative approaches preferred to
direct “price control” Pre-condition is unbundling policy
(Ministry), regulatory (NRA) and operational (multiple operators) functions
Competition . . . Unbundle optimally
Break at the boundaries of essential facilities and the potentially competitive E.g., do not allow same firm to operate
backbone network, cable landing stations, satellite gateway as well as access network
But very rare, because of Incumbent resistance Employee/union opposition Time necessary to unbundle properly is rarely
available Concerns re maximizing sale proceeds US, UK, Sri Lanka, India, all got it wrong
Competition . . . Essential facilities that cannot be
economically duplicated: Best case: auction on basis of
competition for the market Most cases: incumbent gets control
At least make sure equal treatment, e.g., must pay for licenses, frequencies
Subject to a well-drafted license/concession contract
If retained with integrated operator, ring fence and create safeguards for competition
Competition . . . For the rest: Individual licenses where
scarce resources are required; authorizations otherwise Discretion only where frequencies, number
blocks, and rights of way are involved Use well-designed auctions to constrain
discretion (with revenue enhancement as secondary objective)
Otherwise, post the criteria and authorize anyone who meets them to enter Government does not decide how many players Market decides the number
Practical actions to establish independent regulatory framework
Proper market design at point of reform Second or third best solutions cannot be ruled
out Preset regulatory framework, reducing
discretion as much as possible Provide for competent and adequately
endowed regulatory agency Get proper leadership and staff
Confident, competent, courageous, communicative, committed
Preset regulatory framework: interconnection
Interconnection rules to be promulgated, along with default termination rates and points of interconnection Very difficult to define specific
interconnection points without engineers from both sides participating, but do it
Will need international experts; do not rely on former/current incumbent officials
Preset regulatory framework: tariffs
Forget about price cap/revenue cap regulation that involves esoterica such as calculating cost of capital and productivity factors, at least for first few years
Keep it simple Constrained discretion Limited expertise required
Preset regulatory framework: tariffs Best case I: If small number of new entrants
Have them bid on values of the components in a pre-set formula; reset the formula in five years or so
Minimize pass throughs and exchange-rate factors because ICT infrastructure technology is dropping in price
Best case II: If significant number of players Unregulate prices of all but the incumbent Adopt and implement simple rate rebalancing
plan for incumbent
Preset regulatory framework
Objective In the most controversial cases,
regulator should be able to say, I cannot do what you ask me to do, rather than I will not do
In the first few years, the regulator should be cooking from recipes, not inventing new cuisine
Practical actions to establish independent regulatory framework
Proper market design at point of reform Second or third best solutions cannot be ruled
out Preset regulatory framework, reducing
discretion as much as possible Provide for competent and adequately
endowed regulatory agency Get proper leadership and staff
Confident, competent, courageous, communicative, committed
Competent & adequately endowed regulatory agency While it may be possible to do without ex-ante
specialized regulatory agencies and minimize even ex ante roles in industries such as port services, that is not the case with ICT infrastructure
Not possible to write concession contracts that would address all contingencies Pace of technological and market changes does not
allow too much fixity Complexity and interleaving of ICT networks require
some bespoke solutions Competent, independent regulatory agency
Competent & adequately endowed regulatory agency
Many countries (or the consultants who work for them) write nice laws, but the key is effective implmentation
Necessary conditions = laws and subsidiary legislation
Sufficient conditions = people and what they do
Necessary conditions (examples from Sri Lanka’s multisector agency)
Own fund; financed through regulatory levies
Accountability to Parliament through annual report
Staggered appointments of members by Prime Minister with concurrence of Constitutional Council Constitutional Council is broadly representative Bipartisan input into appointments as
governments change Continuity
Necessary conditions (examples from Sri Lanka’s multisector agency)
Five members defined by subject expertise and experience Part-time
Removal only for cause by Parliament Director General (CEO), appointed by
Commission Government has no role Attend meetings, but no vote Separate “proposal” and “disposal” functions
Necessary conditions Requirement to have a regulatory manual,
setting out procedures Provisions for public hearings and
consultations Mandatory for some purposes in some countries
Insulation from “line” ministry, which tends to represent the partially reformed incumbent Line Ministry has no role in appointments Policy directions may be given only in writing
through Cabinet (screens against arbitrary directions)
Practical actions to establish independent regulatory framework
Proper market design at point of reform Second or third best solutions cannot be ruled
out Preset regulatory framework, reducing
discretion as much as possible Provide for competent and adequately
endowed regulatory agency Get proper leadership and staff
Confident, competent, courageous, communicative, committed
Sufficient conditions: Implementation Organizational structure, recruitment and
training that Realizes economies of regulation Emphasizes commitment to “new” regulation
How to enable, not restrict Breaks from command and control mindset Does not create easy path from incumbent to
regulatory agency Adequate compensation packages to
attract persons with skills and potential
Sufficient conditions: Implementation Leadership matters
Confident Competent Courageous Communicative Committed
No confidence without competence; no results without courage; nothing without communication and commitment
Qualities should be inculcated in staff but leadership must have it to start with Look outside government and industry
Summary: Infrastructure reforms for improved sector performance If government works as it should,
regulatory risk is low Poor countries are poor because
Government does not work well regulatory risk is high investments are low/skewed infrastructure is inadequate economy is hobbled govt is impoverished does not work well
One solution: independent and effective regulatory agency
Regulation as a means, not the end
Can regulation work in countries like Sri Lanka?
Common responses Ineffective government will create
ineffective regulatory agencies Government/politicians will inevitably
interfere in regulatory agencies, even if they start well
The people with the confidence, competence, courage, communicativeness & commitment do not exist
Can regulation work?
What is the alternative to trying to make it work? Continuation of integrated government
monopolies, or Creation of private monopolies Neither will yield desired outcomes
Of islands and dikes (with credit to the Netherlands) An island (really, just a piece of low-lying
land) emerges from the ocean of bad governance The cause of its emergence is unimportant
Some people who like living on dry land move in and recruit like persons But it’s not quite dry
They work to make it habitable by draining it and building dikes to protect it from the surrounding ocean
Will the island survive? The work is hard and the dikes are
breached sporadically Some of the inhabitants tire of the effort and
think of returning to the aquatic life (ambiguous amphibians)
Others continue to labor, dreaming not only of dry and arable land but of expanding the island
For those who don’t like living in the ocean of bad governance, there’s no alternative to trying