TELECOMMUNICATION REFORMS IN THE ASIA-PACIFIC REGION

Sang H. Lee Southeastern Louisiana University and Sanford V. Berg University of Florida November 1999

Abstract: Countries of the Asia-Pacific region have adopted a variety of structural and regulatory reforms in the telecommunications sector for two reasons: (1) to promote the development of the industry, expanding basic service availability and (2) to further enhance the infrastructure, providing greater diversity of advanced telecommunications services. Where the Asia-Pacific region departs from the other regions is in the introduction of limited or controlled competition and the nature of ownership reforms. In most of the countries, the introduction of competition has been managed in such a way that growth of a national (i.e., incumbent) telecommunication operator is protected from direct competition or uncontrolled competition, in particular from overseas competition. Also many countries in the region have promoted the creation of innovative arrangements such as Build-Transfer (BT) schemes and traditional joint ventures so that the private investment is allowed in the sector while the governments retain majority control. In this paper, the general trend of the telecommunication reforms in the region is descriptively analyzed by reviewing the region's telecommunications legislative and ownership reforms and competitive market restructuring efforts of the governments in the regIon.

This study has benefitted a lot from the support provided by the Public Utility Research Center. I thank Dr. Sanford Berg for his valuable comments. Luis Gutierrez also provided valuable information on numerous occasions.

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1. Introduction

Regulatory reform depends on a country's circumstances--in particular, its regulatory background and administrative and political institutions. Countries of the Asia-Pacific region l have adopted a variety of structural and regulatory reforms in the telecommunications sector for two reasons: (1) to promote the development of the industry, expanding basic service availability and (2) to further enhance the infrastructure, providing greater diversity of advanced telecommunications services. 2 To a large extent, the level of existing network development has dictated the nature and scope of policy reforms in the region. The major trends of telecommunication reform in the region can be characterized as ownership reforms by privatization (typically by corporatization)3 of a monopoly telecommunication operator and the establishment of a separate regulatory agency4 through changes in telecommunication legislation. First, privatization of the monopoly operator has been common, with private sector participation being a key component of sector development strategies in the region. However, private participation in the incumbent operator has generally been limited to the sale of minority shares on a national or international stock exchange (International Telecommunication Union, 1998b). Second, most countries in the region have made changes to existing telecommunication laws in order to implement their sectoral reforms.

1Among many countries in the region, 15 countries that provide sufficient statistics for empirical studies in another study are focused on in this paper: Australia, Bangladesh, China, Hong Kong SAR (Special Administrative Region), India, Indonesia, Japan, Korea, Malaysia, New Zealand, Pakistan, Phillippines, Singapore, Sri Lanka, and Thailand.

2Economies such as China, Bangladesh, India, Indonesia, Pakistan, Phillippines, and Sri Lanka, which have less than five main telephone lines per 100 inhabitants, fit into the first category, while economies such as Australia, Hong Kong SAR, Japan, Korea, New Zealand, and Singapore, which have about 40 or more lines per inhabitants, fit into the second. See International Telecommunication Union (1998a). 3Corporatization--the transformation of the national carrier from a government department to a commercial entity as a way of ownership restructuring--is most frequently the sale of a minority of shares, either to a strategic investor or as a public offering. Rather than full privatization, the AsiaPacific region has utilized corporatization of state-owned telecommunication companies. 41t implies the separation of regulatory functions from telecommunication operations.

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The majority of countries have opted for gradual legislative change by enacting additional laws for specific policy initiatives, while a few countries have chosen instead to overhaul the entire system by introducing comprehensive new legislation. In several countries, legislative change has been accompanied by the establishment of a separate regulatory agency. Since Asia's first separate regulator was set up in 1979 in the Phillippines, 7 out of the 15 countries--Australia, India, Malaysia, Pakistan, Phillippines, Singapore, and Sri Lanka--have established separate regulatory agencies. This trend towards the establishment of separate regulatory agencies is expected to continue since the 6 other countries--Hong Kong, Indonesia, Japan, Korea, New Zealand, and Thailand--have adopted either entirely or partially the World Trade Organization (WTO) Reference Paper on Regulatory Principles that calls for a regulator that is separated from the operator. 5 However, where the Asia-Pacific region departs from the other regions is in the introduction of limited or controlled competition and the nature of ownership reforms. In most of the countries, the introduction of competition has been managed in such a way that growth of a national (i.e., incumbent) telecommunication operator is protected from direct competition or uncontrolled competition, in particular from overseas competition. 6 Also many countries in the region have promoted the creation of innovative arrangements such as Build-Transfer (BT)

5The WTO Agreements on Basic Telecommunication Services (1997) is a multi-lateral accord to increase access to telecommunication markets worldwide. Out of the 69 countries that signed the Agreement, 16 are from the Asia-Pacific region. The regulatory implications of the WTO Agreement for the Asia-Pacific countries are significant in that most of the participating governments adhere also to the Reference Paper that outlines key regulatory principles aimed at avoiding anti-competitive behavior in their local markets. With that purpose, the governments in the region have to establish mechanism to ensure separation of regulation from operation, interconnection on non-discriminatory terms and conditions, transparency in licensing process, universal service obligation in a transparent, non-discriminatory, and competitively neutral manner. See International telecommunication Union (1997). 6This also has been a typical case for countries where an incumbent telecommunication operator constitutes a significant part of the total market capitalization. In such circumstances, privatization of the incumbent has been used to promote the development of the local stock exchange, while the degree of market competition has been under the state control to keep the stock exchange attractive to foreign capital. Privatization of national operators in Indonesia, Malaysia, Pakistan, Korea, and Singapore has helped the development of local stock exchanges.

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schemes and traditional joint ventures so that the private investment is allowed in the sector while the governments retain majority control. This feature explains why several Asian governments have preferred to work with the legacy of legal restrictions on ownership and to use structural tools such as BT schemes to achieve infrastructure development. Some cultural and historical factors are also associated with the region's persistent reluctance to give up state control in the telecommunication sector. Two arguments are used to support state control: underlying national security concerns or beliefs such that the assets which control the processes of national economic development should remain in state hands. In short, a key feature of telecommunication reforms in the Asia-Pacific region lies in the fact that regulators have focused on (1) balancing the dual aims of protecting strategic national assets while expanding supply to meet demand and (2) adopting policies that limit the industry's vulnerability to overseas competition. Another important feature of telecommunication reforms is that countries in the region have avoided granting long term exclusivity to incumbent telecommunication operators. As a consequence, a large number of new operators have been licensed, introducing a degree of competition in some segments of telecommunications services, typically in value-added services.? The rest of the paper is organized as follows. In Section 2, I review how the telecommunication legislative reform has proceeded and what principal issues have generally been addressed in the reform. Section 3 explains the nature of ownership reforms and outlines a variety of privatization schemes adopted in the Asia-Pacific region. In Section 4, we address market liberalization and competitive market restructuring issues, and explain how the governments in the region have introduced competition in the telecommunication sector. Finally, in Section 5, other important regulatory issues such as interconnection, universal service, and price regulation are examined. Concluding remarks follow in Section 6. 7The most significant impact of progressive liberalization has been observed in the market for long-distance calling. In three of the region's developed countries such as Australia, Japan, and New Zealand, new entrants have succeeded in taking up to a third of the market for long-distance calling and service rates in the market have come down by 10-15 percent since 1993 as the incumbent operators have responded to the new entrants. See International Telecommunication Union (1997).

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2. Legal Instruments and Institutional Profiles in the Telecommunication Sector 2.1 Changes in Telecommunication Legislation Introduction of a sound legal infrastructure for the telecommunication sector not only eases the process of implementing policy objectives but also has a significant impact on attracting private or foreign investment into the sector. 8 As countries have realized that an adequate legislative framework can have positive effects on the growth of the telecommunication sector, new legislation has been introduced in most countries in the AsiaPacific region. Even though policy initiatives vary depending on the economic characteristics and the institutional endowments in each country, the main common telecommunication issues that have prompted the new legislation have been as follows: the introduction of market aspects not previously covered, such as competition; the separation of regulation from operational functions; and the liberalization of certain activities, such as foreign ownership. Thus, telecommunication legislative reform has generally addressed four principal areas: the introduction of competition into local markets; the type of regulatory structure and the processes that are appropriate to obtain the desired telecommunication environment; the extent of ownership change with respect to existing operators; and the specific rules under which telecommunication service providers are to operate (lTV, 1998a). The changes in telecommunication legislation in the region have taken a variety of forms depending on cultural, economic, and social characteristics, as well as the timing of reform. The majority of the countries have chosen to introduce new legislation gradually by modifying existing legislation, while a handful have chosen to overhaul the entire system by introducing comprehensive new legislation. Overhauling a complete legal framework is a lengthy process and, as a result, progress can be extremely slow. One of the principal reasons for this approach is that telecommunication 8S ome economists have argued that "transaction costs" associated with the political process of an economic policy are the primary reason markets do not function as effectively as suggested by neoclassical economic theory. For an analysis of new institutional economics or transaction-cost economics in the context of industrial organization, see Williamson (1989), North (1990), and Dixit (1996).

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legislation often remains untouched for many years. Where countries have adopted to overhaul the entire system, the aim has often been to establish a new institutional and legislative framework for the sector that will be both effective and long-lasting. In the region, Pakistan and Taiwan-China opted for this comprehensive approach. In Pakistan, the Pakistan Telecommunication (Reorganisation) Act XVI in 1996 permitted the transfer of services to the private sector and established new institutional structures such as the Pakistan Telecommunication Authority (PTA). The legislation also included provisions for regulation of the sector. The Reform Bills passed in Taiwan-China in 1996 marked a total revamping of the existing principal telecommunication law--the Telecommunication Act enacted in 1950. The major changes made under the Reform Bills are the separation of regulation (the Directorate General of Telecommunications) from a telecommunication operator, corporatization of the telecommunication operator, and opening the sector to the private participation as well as foreign investment. However it is noteworthy that, in Taiwan-China, four years of heavily politicized negotiations were required for the Reform Bills to be passed. The majority of Asia-Pacific countries have opted for gradual legislative changes and have passed additional laws or amendments to achieve policy initiatives that were not allowed under the existing laws. An example of such partial legislative modifications is adding provisions to permit competition in certain market segments or to allow private participation into segments under the control of the state. The MTPT Decree 124/1995 in Indonesia opened the national network to private sector joint ventures under limited-life BT schemes. In Korea, the Telecommunication Business Law amended in 1995 authorized the liberalization of the basic service market. In countries such as Indonesia and the Phillippines, specific legislation has been used to support exclusive monopoly periods over certain market segments or to force operators to undertake specific actions such as to allow interconnection. In Indonesia, the MTPT Decree 60/1995 granted the incumbent operator (Telkom) exclusive rights to provide nationwide local fixed-line services until 2010 and domestic long-distance services until 2015. Together with the Law 3/1989 that laid the groundwork for private sector participation along with the incumbent, the specific legislation helped increase the private sector's involvement in its privatization. As

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an example of the latter, in the Phillippines, the Executive Order (EO) 59 mandated compulsory interconnection between all operators and allowed the regulator to intervene in interconnection disputes that were not resolved within 90 days. Specific legislation has also been used to specify the parameters and procedures for achieving policy or regulatory goals or to indicate where responsibilities lie. In Singapore, the scope of the regulator's responsibilities and powers in licensing and regulating the sector is stated in the Telecommunication Authority of Singapore Act (1992). Another example is the Telecommunication (Disclosure) Regulations (1990) in New Zealand. Even though the market has been open to full competition since the Telecommunication Act was amended in 1987, the Telecommunication Regulations require the incumbent (Telcom New Zealand) to disclose prices and details of interconnection agreements. As a whole, countries that take legislative reform in response to the new telecommunication environment have a series of broad options: separation of regulatory function from an operator; the corporatization and privatization of the incumbent operator and; liberalization of the market by introducing competition into market segments. As the industry goes through transition, the primary question will be whether recourse is sought through the existing bureaucratic mechanisms, through the judicial system of the country, or through new sector-specific regulatory agencies.

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Table 1. Telecommunication Reform Legislation in the Asia-Pacific Region Country

Year

Main Laws/Regulations

Main Provisions

Australia

1991

Telstra Corporation Act

1996

Telstra Act (Dilution of Public Ownership) Telecommunications Act

Provides for price controls on Telstra along with matters relevant to the government's role as Telstra shareholder. Provides for the sale of one third of Telstra.

1997

Provides for licensing carrier and service provider rules, consumer measures and technical regulations.

India

1997

Telecommunication Regulatory Authority of India (TRAI) Act

Establishes TRAI as the new regulator and rules its functions and structure.

Indonesia

1993

Government Regulation 8/1993 Decision of the Minister of Tourism, Posts and Telecommunications (MTPT) KM.39/KS.OO2/MTPT MTPT Decree 124/1995

Creates framework for organizing telecommunications. Facilitates cooperation in arranging basic telecommunication services.

1984

Telecommunications Business Law

1997

NTT (Nippon Telegraph & Telephone) Law

Governs such items as permission, authorization, etc., regarding the telecommunications business. Reorganizes NTT into two regional companies for eastern and western Japan and one long distance company under a holding company, to take effect in 1999.

1995

Telecommunications Business Law

1995

Telecommunications Basic Law

1993

1995 Japan

Korea

Allows private sector participation in the national network.

Provides for licensing, registration of telecommunication operators, competition safeguards, rights of telecommunication service users, and construction/maintenance of telecommunications facilities. Provides for ministerial authority regarding promotion of telecommunications technology, management of telecommunications network, and organization/operation of the Korea Communications Commission (KCC).

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Table l.--continued. Country

Year

Main Laws/Regulations

Main Provisions

New Zealand

1987

Telecommunications Act

1990

Telecommunications (Disclosure) Regulations

1994

Telecommunications (International Services) Regulations

Provides government with power to regulate and establish rights for access to land or lay cable. Imposes information disclosure requirements on Telecom New Zealand on prices and terms/conditions under which certain services are supplied. Establishes registration for certain international services.

Pakistan

1996

Pakistan Telecommunications (Reorganisation) Act XVI

Creates framework for the telecommunication system, including establishment of Pakistan Telecommunication Authority (PTA), regulation of telecommunication industry, transfer of telecommunication services to the private sector, etc.

Phillippines

1979 1993 1993 1995

Executive Order (EO) 546 EO 109 E059 Public Telecommunication Policy Act (RA 7925)

Creates regulatory agency. Provides for universal access. Provides for mandatory interconnection. The Telecom Policy Act of 1995.

Singapore

1992

Telecommunication Authority of Singapore (TAS) Act

Defines the functions and powers of TAS in the area of licensing and regulation.

Thailand

1934

Telegraph and Telephone Act

Empowers the Post and Telegraph Department (PTD) to monopolize the provision of telecommunication services to the public, which are at present, transferred to the Telephone Organization of Thailand (TOT) and the Communications Authority of Thailand (CAT).

Source: International Telecommunication Union (ITU)/Telecommunication Development Bureau (BDT) Regulatory Database.

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2.2 Separate Regulatory Agencies One key issue of restructuring infrastructure sectors such as network utilities is to develop an internal organization that has the institutional capacity to restrain arbitrary political interference and to commit to a stable and credible regulatory process. In the context, separating operational activities from government oversight and regulation is perhaps the most important element of regulatory reform. This separation is necessary to ensure fair and impartial policy development, to insulate telecommunications from short-term political pressure,9 and ultimately to admit competition into the sector (Kambhato, 1998). Historically, with the exception of a few countries with competitive markets or those in which the monopoly service providers were in private hands, the majority of state-owned operators were under a regime of self-regulation. This means that the relevant ministry was in charge of macro-regulation for the sector (maintaining a monopoly market structure through which it could implement policy) with the monopoly operator responsible for micro-regulation (monitoring quality of service, dealing with consumer complaints, tariff issues, and so on). As the telecommunication sector is increasingly liberalized, new operators, struggling to compete with an incumbent carrier that controls the public network, have begun demanding the establishment of independent regulatory bodies capable of mediating among the various players in the sector. In other words, the new profile of the industry have created an urgent need for the development of separate and capable regulatory institutions. This pressure is heightened in those cases where the state retains ownership or control of the dominant domestic carrier. One of the most explicit manifestations of this is imbedded in the regulatory principles adopted in the context of the recent WTO Agreement on Basic telecommunication Services. The WTO Reference Paper on the Regulatory Principles states that "the regulatory body is separate from, and not accountable to, any supplier of basic telecommunications services. The decision of and the procedures used by regulators shall be impartial with respect to all market participants."

9Governments have a strong incentive to pursue policies with short-term benefits, even if they have high long-term costs. In particular, when budgetary constraints are tight, governments have an incentive to use public enterprises, such as network utilities, to advance political and social goals.

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Two important but closely related issues associated with the establishment of a separate regulatory agency are its autonomy and independence from political interference. Among the regulatory agencies separated from the incumbent carrier, it is possible to identify two main types: the agency with no (or strictly limited) policy oversight from the relevant ministry; and the agency, with a given mandate to regulate the sector, but with oversight by the relevant ministry which retains the authority to issue general directives and/or control funding. Even though the latter type has been a predominant model in emerging economies in the Asia-Pacific region, the relevant ministry has tended to remain closely involved in the operation of the regulatory agency. Insulation from the political process is one of the most difficult goals for the regulatory body to achieve. The institutional structure of the regulatory agency may have an impact on its independence. For example, whether the institution is headed by a single person (e.g., a director general) or a collegial body (e.g., a commission) may possibly influence the degree of potential independence of the agency. However, the level of real autonomy achieved by the regulatory agency will depend just as much upon random factors such as the personality of the individuals involved, political and institutional traditions in the country, and the existing economic and political conditions. The creation of separate regulatory agencies in the Asia-Pacific region has proceeded slowly. A decade after the region's first separate regulator--the National Telecommunication Commission (NTC) of the Phillippines, only two separate regulatory agencies were added-Jabatan Telekom Malaysia (JTM) and the Australian Telecommunication Authority (AUSTEL, now Australian Communications Authority (ACA)). These were followed in 1992 by the Telecommunication Authority of Singapore (TAS); in 1993 by Hong Kong SAR's Office of the Telecommunication Authority (OFTA); in 1996 by the Pakistan Telecommunication Authority (PTA); and in 1997 by the Telecommunication Regulatory Authority of India (TRAI), the Nepal Telecommunication Authority (NTA), and the Telecommunication Regulatory Commission of Sri Lanka (TRCSL). Despite the significant diversity in terms of institutional arrangements, powers, jurisdiction, and mode of operation, the growing trend towards standardization of regulatory agencies may be expected since many countries in the region have adopted entirely or partially

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the WTO Reference Paper on Regulatory Principles that set down regulatory reqllirements worldwide. Table 2 summarizes the structures and main responsibilities of the separate regulators in the region.

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Table 2. Telecommunication Regulators in the Asia-Pacific Region as of 1997 Country

Regulator

Supervision/Finance

Main Responsibilities

Australia

ACA (1997) ACCC (1989)

Department of Communications and Arts/ Licence fees, government appropriation

ACA deals with licensing and monitoring carrier performance including customer satisfaction and quality of service. ACCC regulates competition policy functions.

Hong Kong SAR

OTA (1993)

Economic Services Bureau, Government Secretariat/ Licence fees, government appropriation

Licensing, promoting fair and competitive operating environment, resolution of interconnection disputes, and protection of consumer interests.

India

TRAI (1997)

Parliament/ Access fees, government appropriation

Tariff setting, deciding revenue sharing between operators, quality of service, dispute settlement, effective interconnection, consumer complaints.

Malaysia

JTM (1987)

Ministry of Energy, Telecommunications and Posts/ Government appropriation

Monitoring carriers, promoting competition, orderly development of the sector.

Nepal

NTA (1997)

Ministry of Information and Communications/ Licence fees

Pakistan

PTA (1996)

Ministry of Communications/ Licence fees, own resource and royalty

Licensing, determining interconnection charge, enforcing interconnection, promoting competition, monitoring quality of service, tariff setting, price control, customer complaints, dispute settlement and providing policy advice.

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Table 2.--continued. Country

Regulator

Supervision/Finance

Main Responsibilities

Phillippines

NTC (1979)

Department of Transportation and Communications/ Government appropriation

Licensing, tariff regulation, monitoring operator activities, quality of service, ensuring compliance, tariff setting, price control, and setting guidelines for interconnection.

Singapore

TAS (1992)

Ministry of Communications/ Licence fees, numbering fees, spectrum fees

Policy making and developing legislation for the sector, licensing, ensuring compliance, tariff setting, price control, promoting fair and competitive operating environment, resolving disputes, setting principles of interconnection and access charges, service quality, and consumer complaints.

Sri Lanka

TRCSL (1997)

Ministry of Posts, Telecommunications & Medial Licence fees, spectrum fees, government grant

Licensing, monitoring operator activities, service quality, ensuring compliance, tariff approval, determining interconnection rates, and establishment of license fees together with the sector ministry and another ministry.

Note: ACCC=Australian Competition and Consumer Commissions. Source: ITU/BDT Regulatory Database.

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3. Ownership Reforms in the Asia-Pacific Region 3.1 Rationale behind Telecommunication Privatization Most economists argue that a primary objective of economic policy should be to promote effective competition where feasible in order to induce more efficient allocation of resources. Privatization, along with other instruments of microeconomic policy, can help achieve that goal by changing the structure of incentives and opportunities for decision makers within firms (Kessides, 1998). In the telecommunications sector, where public ownership is extensive, private sector participation has been constrained by concerns about market failure due to perceived characteristics of telecommunications: large specific, sunk investment; economies of scale and scope; and massive consumption by a broad range of domestic users. However a reassessment of conventional policies and ownership structure is advocated by many policy analysts in response to substantial technological and structural changes. Recent advances in economic theory--especially recognition of the importance of principal-agent problems--have also played a crucial role in preparing the ground for privatization. The relationship between managers (agents) and owners (principals) of a firm gives rise to specific agency problems since they do not necessarily share the same objectives. Hence, the owner of the firm seeks to establish incentives that will induce the manager to act in ways that contribute maximally to the principal's interests. Io For example, under private ownership, not only is the pursuit by management of its own objectives restrained by shareholders and potential strategic investors but also the firm can tie managerial compensation to corporate performance through rewards such as bonuses and stock options. However, in state-owned enterprises, the aforementioned mechanisms are nonexistent or less effective. Governments (principals) do not necessarily seek to maximize profits or efficiency since their shares are nontransferable and there is little threat of bankruptcy as a constraint on financial performance. Also, perhaps most importantly, politicians, who have the power to dismiss managers, are subject to pressure from favored customer groups and

laThe main difficulty in establishing such an incentive structure is that the principal does not have full information about the agent's circumstances and behavior. See Baron and Myerson (1982), Laffont and Tirole (1986, 1990a, 1990b, 1994), and Lewis and Sappington (1988a, 1988b, 1989, 1997).

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employees, who do not want to see profits achieved at the expense of high prices and low wages. Neither form of ownership--public or private--is absolutely superior to the other in all industries or all countries. Nevertheless, the evidence on comparative performance indicates that the lack of incentives under state ownership is critical and pervasive enough to justify a general presumption that the structure of property rights has significant effects on the behavior and performance of firms in favor of private ownership. 11

3.2 Privatization in the Asia-Pacific Region In the Asia-Pacific region, private participation in the ownership of incumbent national carriers has generally been implemented through traditional privatization--the sale of minority shares on national and international stock exchanges. For instance, either full or partial privatization of state-owned operators had been undertaken by the end of 1992 in Australia, Japan, Malaysia, and New Zealand. And (minority) sales of incumbent carriers in India, Indonesia, Korea, Pakistan, and Singapore were all completed between 1988 and 1996. 12 In 1997, Sri Lanka Telecom and Australia's Telstra were partially privatized. In addition to retaining strong state control in the sector, Asia-Pacific governments have kept a tight curb on foreign investment. This was highlighted during the recent WTO negotiations on basic telecommunication services where most countries in the region retained lower caps on foreign ownership of local telecommunication companies compared with other regions. State control is one of the key features that differentiates these sales from those in other parts of the world. Asia-Pacific governments long ago identified telecommunication infrastructure as a strategic industry that serves as a catalyst for economic development and

IlFor quantitative analyses of the effects of privatization and competition on the telecommunications sector, see Ramamurti (1996) and Ros (1999). Based on a panel data analysis, Ros concludes that privatization is positively associated with network expansion, while competition is found to positively affect network efficiency. 12Pakistan has attempted to place 26 percent strategic equity in the incumbent carrier with a foreign telecommunication company, but the process has been delayed by more than four years mainly by political difficulties unrelated to the privatization.

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have been reluctant to give up ownership of the companies and the assets that control that process. Only a handful of economies such as Australia, Hong Kong SAR, and New Zealand have instituted liberal ownership reforms that encourage private and foreign ownership across all segments. In particular, New Zealand's privatization departs from the main trend in privatization in the region. The sale was unique in that 100 percent of Telecom New Zealand was sold via a private sale to two foreign telecommunication companies. 13 Despite a growing propensity to privatize the incumbent carriers, more than half of the Asia-Pacific operators still remain 100 percent state-owned. And those states that have employed corporatization have also retained majority control. The motivation for privatization has most often been to raise capital--either to plow back into infrastructure development or to fund other social programs--rather than to introduce private sector participation within the national operator as part of a broader liberalization scheme. 14

l3U.S. carriers Ameritech and Bell Atlantic each purchased 50 percent in Telecom New Zealand in a private sale in 1990. See International Telecommunication Union (1998a). 14For example, a key reason behind the privatization of Singapore Telecom was to boost the local stock market. See Ure (1995).

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Table 3. Privatization of the Incumbent PTOs as of 1997. Country

Company

Privatization

Foreign Ownership

Australia

Telstra

33.3% (1997)

No restriction

Bangladesh

Bangladesh Telegraph and Telephone Board (BTTB)

State-owned

No commitment

Hong Kong SAR

Hong Kong Telecom (HKT)

100%

No restriction

India

Mahanagar Telephone Nigam (MTNL)

42.6% (1994-97)

49%

Indonesia

PT Telkom

23.15% (1995-96)

35%

Japan

NTT

34.6% (1986-88)

No restriction, but 20% for KDD and NTT

Korea

Korea Telecom (KT)

28% (1993-96)

49%, but 20% (33% from 2001) in KT

Malaysia

Telekom Malaysia

33% (1990-97)

30% in existing licensed PTOs

New Zealand

Telecom New Zealand

100% (1990)

No restriction

Pakistan

Pakistan Telecom

11.8% (1994-96)

40%

Phillippines

Phillippine Long Distance Telephone Company (PLDT)

100%

40%

Singapore

Singapore Telecom

17% (1993-96)

49%

Sri Lanka

Sri Lanka Telecom

33.5% (1997)

35%

Thailand

Telephone Organization of Thailand (TOT)

Adopted BOT schemes since 1990

20%

Note: Limits on foreign ownership in the last column are the commitments the countries have made to the WTO Agreements and apply to the whole telecommunication sector, including the state-owned incumbent unless indicated otherwise. Malaysia, Pakistan, and the Phillippines have partially adopted the WTO Regulatory Principles. Bangladesh has committed only to future adoption. All other countries have entirely adopted the WTO Regulatory Principles. Source: ITU World Telecommunication Report 1996/1997; ITU/BDT Asia-Pacific Telecommunication Indicators, 1997; ITU/BDT Regulatory Database.

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3.3 Non-traditional Strategies of Privatization Adopted in the Asia-Pacific Region The feature of state ownership carries through into the ownership profile of telecommunication entities that have pursued non-traditional privatization strategies 15 as well. Governments in the region have been careful to maintain state ownership in "strategic segments" of the sector, which generally equate with basic services. This has been achieved through the use of various mechanisms that encourage private participation but leave existing legal prohibitions on private ownership intact.

(1) Build-Transfer-Operate (BTO) Under the BTO scheme, a company is first awarded a concession to build a telecommunication network or service. Immediately after completion of its construction, the company hands over its ownership to the national telecommunication administration or public telecommunication operator (PTO) and operates it for a specified period of time. For instance, in Thailand, there are two 25-year BTO concessions involving the construction of fixed lines. Thai Telephone and Telecommunication (TT&T) and TelecomAsia are awarded the concession for the construction of 1.5 million lines in provincial areas and 2.6 million lines for Bangkok, respectively.

(2) Build-Operate-Transfer (BOT) The BOT scheme differs from the BTO in that a company awarded a concession operates its investment for a certain period of time before handing over its ownership to the national telecommunication administration or public telecommunication operator (PTO). In addition to the purpose of injecting private capital to help fund local build-out, this scheme has been used to limit direct competition to the incumbents. This has been the case in Indonesia, Thailand, and Vietnam where new ventures have been set up to provide local services in areas served by the incumbents, but do not constitute direct competition because they share the market, and revenues are split between them. The Joint Operating Schemes currently adopted

All subsequent examples for the non-traditional strategies are cited from International Telecommunication Regulatory Database and Ure (1995). 15

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by Indonesia are quasi-BOT schemes. In Indonesia, when the country was split into seven operating zones, five zones were transferred to BT ventures between local-foreign firms; the incumbent (PT Telkom) retained the most lucrative areas including the capital, Jakarta.

(3) Joint Operating Scheme (JOS) The JOS refers to an arrangement whereby a private operator constructs and operates a section of the national network in return for revenue sharing with the PTa. In Indonesia, where the law dictates that the private sector can only provide domestic basic services jointly with the incumbent PT Telkom, the government opted for the JOS to encourage private participation in the development of the national network. The private operators (KSOs) operate the network on behalf of PT Telkom and must hand over the assets at the end of the I5-year term in 2010. 16

(4) Business Cooperation Contract (BCC) The BCC refers to loose agreements which establish an intention to cooperate on a specific project. Under a BCC, an appropriate level of revenue share is agreed to in return for the construction of infrastructure. For instance, in Vietnam, Telstra of Australia has provided international long-distance services under the BCC with the Vietnam Posts and Telecommunications (VNPT).

(5) Build-Own-Operate (BOO)/Joint Venture Unlike all other schemes mentioned above, few or limited restrictions are imposed on ownership in the BOO/Joint Venture scheme in that the assets remain with the investors at the end of licensing period. Foreign ownership restrictions usually dictate that overseas investors are involved by way ofjoint venture with local firms. This scheme has been used in Australia, Hong Kong, Japan, India, Malaysia, and New Zealand. Among the several ownership reforms mentioned above, the ownership reform that has had the biggest impact in the region is licensing, in which governments directly license private firms. Licensing has been widely used by regulators in the region as a tool for achieving specific policy objectives by tailoring license terms. Numerous economies have taken this

16There are five KSOs in Indonesia--Pramindo Ikat, Aria West, Mitra Global Telekom, Daya Mitra, and Bukaka SingTel--which together have committed to construct a minimum 2 million lines by 1999.

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approach, including Australia, Hong Kong SAR, India, Korea, Malaysia, New Zealand, the Phillippines, Singapore, and Taiwan-China. 17 Another characteristics that sets the Asia-Pacific region apart from other regions is that regulators have favored direct assignment of licences rather than sales by auction. Increasingly, the model for licence allocations appears to be that operators put down a performance bond, propose tariff rates and their plans for network development, and state when the network will be up and running.

4. Competitive Market Restructuring 4.1 Is Privatization Alone Good Enough? Most regulatory regimes under which long-term exclusive monopolies were awarded to the incumbents have been based on (undue) concerns about market failure and (potentially) excessive optimism about the ability of governments to increase efficiency through intervention. However, recognition of the lack of management incentives under state ownership and increasing private participation in the telecommunication sector have been a rationale for privatization of the incumbents. One important lesson that emerges from the experiences of both developed and developing countries is that for privatization to generate significant gains in economic efficiency, it must be accompanied by market liberalization and competitive market restructuring. In other words, it is not enough to simply replace a public (natural) monopoly with a private one. 18 Petrazzini and Clark (1996), based upon a study of the effects of liberalization in 26 developing countries, argue that competition is likely to be the primary driver towards dynamic welfare effects, and that privatization alone does not guarantee l7In developing Asia-Pacific markets, however, such ownership is generally limited to peripheral service segments such as mobile cellular. l8It is never clear ex ante what the extent of the natural monopoly is. So it might be useful to let markets determine whether the monopoly is indeed natural. Competition is often valuable for the very same reason that it is impossible to quantify ex ante that it will be valuable. For instance, if one could predict innovation, whether organizational or technological, any incumbent could match the competitive outcome. It is precisely because one can not predict innovation that competition is beneficial and by the same token one can not quantify its benefits. See Klein (1996) and Kessides (1998).

23

competition. Competition or liberalization essentially refers to the removal of barriers to market entry. To achieve liberalization as a policy objective, the rules, regulations, and procedures governing the behavior of the dominant telecommunication operator towards the new entrants must be more critical. Issues such as interconnection, predatory pricing, structural and separation accounting to prevent hidden cross subsidies, discriminatory pricing, tie-in arrangements, and so forth, are the nuts and bolts of regulation in the telecommunication industry. Baumol and Sidak (1994) specifically address the competition issue in local telephony. They argue that virtually any arrangement on the part of regulators to manage markets will seriously distort economic efficiency, and that the best method to determine "natural monopoly" is to ensure that entry barriers are not erected. Until recently, most economies that introduced market liberalization shared a common characteristic in that competition emerged first in the periphery of the telecommunication sector, where services are marginal to the incumbent's operation. In most countries around the world, the first segments of the market opened to competition were value-added and mobile cellular services. However, with the successful conclusion of the WTO Agreements on Basic Telecommunication Services, a number of countries are expected to introduce competition in basic services in the near future.

4.2 Competition Trends in the Asia-Pacific Region

While the Asia-Pacific has become one of the most competitive regions in the world in terms of mobile cellular services, the introduction of competition into basic services in the region is at an earlier stage. More than 60 percent of Asian countries have yet to introduce any competition into local or long-distance services. Most countries have focused on opening mobile cellular and data services to competition first. This trend holds true for developed as well as developing economies in the region. For instance, Korea and Taiwan-China have introduced competition in mobile cellular but have been comparatively restrictive of competition in the fixed network, given their level of economic development. In particular, Taiwan-China has an open-ended monopoly over fixed services--Iocal and domestic and

24

internationallong-distance--extending a minimum of five years beginning in 1995. In Singapore, competition in fixed line services will not begin until Singapore Telecom's exclusive monopoly expires in 2000. Where countries have introduced competition into basic services, they have often taken a tentative approach by allowing limited competition--often in phases. 19 In Korea, for instance, competition began in core basic services in 1991 when a duopoly was permitted in international long-distance. Five years later a duopoly in domestic long-distance began with a third international operator, Korea Global Telecom, in 1997. Such an approach was adopted even in Asia's most progressive markets. In Australia, the move from a monopoly to multi-operator environment took more than six years. Liberalization began in 1991 when Optus Communications was licensed to compete with the then state-owned national operator Telstra, and unrestricted access commenced in 1997. Two clear exceptions to this trend are Malaysia and the Phillippines. Both countries have introduced a high level of competition across all segments. Malaysia has six operators in local and international long-distance services, and seven in domestic long-distance services. The Phillippines has 74 companies licensed to provide local services, four in domestic longdistance, and nine in international long-distance services. However, the Phillippines case is unique among the region's developing countries in that there is no state ownership in the sector. Even the incumbent, Phillippine Long Distance Telephone Co. (PLDT), is completely privateowned.

All subsequent examples are cited from the International Telecommunication Union Regulatory Database. 19

25

Table 4. Telecommunication Sector Reform on Market Access as of 1997. Country

Progress in the Telecommunications Sector Reform on Market Access

Australia

Liberalized in 1992

Bangladesh

Partial liberalization of rural Public Switched Telecommunications Network (PSTN).

Hong Kong SAR

4 private PSTN operators since 1995. Competition in infrastructure after 1998.

India

Liberalization in local PSTN in 1996. New licenses for fixed networks upon approval of regulatory authority. One operator in addition to incumbent in each service area.

Indonesia

Liberalization of state-owned operators on joint-operating scheme (KOS) basis. A review of exclusive right policy in 2001 for local, in 2006 for longdistances, and in 2005 for international.

Japan

Domestic market liberalized.

Korea

Competition in fixed network services.

Malaysia

Already open market access.

New Zealand

Liberalized in 1990.

Pakistan

Phase-out of restrictions on voice telephony from 2004.

Phillippines

Liberalization of private PSTN in 1994. Market access for new entrants by a "public interest" test.

Singapore

Phase-in of competition in facilities-based services from 2000 up to two additional operators.

Sri Lanka

Partial liberalization in international telephone services from 2000 on satisfactory progress in tariff rebalancing. Competition in local and domestic long-distance telecommunication services

Thailand

BTO schemes in 1990. Introduction of market access from 2006.

Source: lTD World Telecommunication Report 1996/1997; Privatization and Competition in Telecommunications (1997)

26 Table 3.5 Level of Legally Permissive Competition in Telecommunication Markets in the AsiaPacific Region as of 1997 Country

Local

Long-distance

International

Mobile-cellular

Australia

C

C

C

C

Bangladesh

PC

M

M

C

China

PC

PC

M

C

Hong Kong SAR

PC

M

C

India

C

M

M

C

Indonesia

PC

M

PC

C

Japan

C

C

C

C

Korea

PC

PC

PC

C

Malaysia

C

C

C

C

New Zealand

C

C

C

C

Pakistan

M

M

M

C

Phillippines

C

C

C

C

Singapore

M

M

C

Sri Lanka

C

C

M

C

Thailand

M

M

M

C

Key: M=Monopoly; PC=Partial Competition; C=Competition. Note: This table reflects what is legally permissible; therefore, it may not reflect the actual number of operators in the market. In the case of mobile-cellular services, all countries allowing more than one mobile-cellular operator have been listed as "competitive". Source: ITU/BDT Regulatory Database.

27

5. Other Important Regulatory Issues The rise of private ownership and the emergence of competitive markets have increased the need for a closer and more thorough oversight of carriers operating in the market. The introduction of competition has brought about complex regulatory issues involving interconnection, universal service provision, and tariff setting. In many cases, the regulatory framework or required expertise has not been sufficient to deal with a host of new regulatory issues. Since the result of inadequate regulatory systems and anti-competition safeguards most often gives competitive advantages to the incumbent, the greatest impact is on the new market entrants. For emerging economies in the region, this will not only dictate the extent to which new operators can contribute to market competition and efficiency gains in the sector, but also affect the pace and pattern of growth in the industry. In a number of countries in the region, common shortcomings in the regulatory process are the absence of clarity and conciseness in policy objectives, and inadequate authority and funding for the regulator.

(1) Interconnection As technological changes and deregulation reduce entry barriers in the sector, interconnection has become one of the most urgent regulatory issues in the region. 20 Since the interconnection charges comprise the major costs for new operators, these have a significant effect on the earnings and growth of new operators using the incumbent's network. In the majority of countries in the region, the lack of interconnection policy has also slowed the introduction of competition into the sector. In China, for instance, the second network operator (Unicorn) had to wait up to 15 months for interconnection with the Ministry of Posts and Telecommunications (MPT) local network. In New Zealand where a non-interventionist approach was adopted, the interconnection dispute between the incumbent Telcom New Zealand and the second network operator Clear Communications lasted more than four years. Interconnection problems have most often arisen in situations where the incumbent is

2°For a concise review of the interconnection configuration, see NTT (1998). Also for a rigorous review of interconnection issues, See Tyler, Letwin, and Burstin (1995).

28

responsible for setting the interconnection rates or where the regulator has set rates that are unduly favorable to the incumbent. In 1995 in Japan, for instance, new common carriers (NCCs) questioned the fact that NTT was including certain costs that were not necessary for connecting the NCCs. After interconnection review, NTT reduced its access charges. In the region as a whole, the interconnection charge is determined by the regulator in 20 percent of countries while operators set the rates in 30 percent of countries and the telecommunication ministry in 27 percent. In general, there are three different types of approaches to the interconnection issue-anti-interventionist, case-contingent interventionist, and active interventionist. The antiinterventionist approach leaves the interconnection charge to commercial negotiations. However, this approach is likely to result in the extended legal disputes as New Zealand experienced. Hong Kong SAR and the Phillippines have adopted the second approach by encouraging service providers to conduct bilateral negotiations with the proviso that the regulator would intervene in instances where negotiations fail. With the active interventionist approach, the regulator either sets the rates or give its approval. In Singapore, TAS has set interconnection charges for the first three years of competitive entry for new fixed-line service providers. In Japan, the Minister of Posts and Telecommunication (MPT) can intervene through interconnection orders and arbitration. Thus, Japan is considering issuing rules for interconnection--Basic Rules for Interconnection--which require the disclosure of the incumbent's accounts as well as the implementation of accounting separation and unbundling of interconnection fees. Two main aspects of an interconnection regime are (1) determination of an appropriate cost-based fee and (2) the technical conditions. Various approaches have been taken in the region?l In Indonesia, for instance, the framework for interconnection charges was transformed from revenue sharing to volume-based accounting to make the collection and the forecasting of interconnection charges easier.

21For a detailed framework of interconnection rates, see Ovum (1997).

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Table 6. Interconnection Arrangements in the Asia-Pacific Region as of 1997 Country

Separation of Policy and Regulatory Roles

Interconnection Guidelines and Legislation

Competitive Safeguards

Australia

Yes

Yes

Yes

China

No

No

Not available

Hong Kong SAR

Yes

Yes

Yes

Indonesia

No

Yes

Not available

Japan

No

Yes

Yes

Korea

No

Yes

Yes

Malaysia

Yes

Yes

Developing

New Zealand

Not available

Yes

Yes

Phillippines

Yes

Yes

Yes

Singapore

Yes

Yes

Yes

Thailand

No

No

Not available

Source: Effective Interconnection in the APEC Region (1997).

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Table 7. Arrangements for Establishing Interconnection Charges in the Asia-Pacific Region as of 1997 Country

Commercial Negotiation

Role of Regulator

Charging Basis

Australia

Yes, preferred

Accept access undertakings, may intervene if negotiation fails

Cost-based (total service long-run incremental cost)

China

Not available

Not available

Not available

Hong Kong SAR

Yes, preferred

May intervene

ADC, Delivery fee

Indonesia

Yes, on occasion

Determines charges

Volume -based

Japan

Preferred in past, moving to a tariff approach for dominant carriers in the future

Tariff approval

Cost-based

Korea

No

Determines charges

Cost-based

Malaysia

Negotiated revenue sharing

None, at present

Revenue sharing

New Zealand

Yes, preferred

No telecom specific regulator, parties have recourse through the courts

As negotiated

Phillippines

Yes

Supervisory

Negotiated, revenue sharing, cost-based

Singapore

Yes, preferred

May intervene

Cost-based (economic cost and long-run incremental cost)

Thailand

Revenue sharing

May intervene if negotiation fails

Cost-based (longrun incremental cost)

Note: ADC=Access Deficit Contribution. Source: Effective Interconnection in the Asia-Pacific Economic Cooperation (APEC) Region (1997).

31

(2) Universal Service The concept of universal service varies more significantly between developed and developing countries. In the developed countries, universal service is typically defined as a telephone in every home, with regulation focused on the provision of services to the marginal groups in society. For many developing countries that are commonly characterized by low household teledensity, the provision of service to every home remains a long-term objective. Thus, the regulatory focus has been on providing universal access to a telephone in the form of village phone and public call offices. As regulators in the region have devised a variety ways to ensure that the goal of universal service is met, the traditional way of promoting universal access--using profits from domestic long-distance and international services to subsidize the provision oflocallines--is being replaced by new methods to ensure that the associated costs are borne by all or some telecommunication service providers. 22 For instance, Indonesia requires operators under BOT agreements with the national operator PT Telkom to spend 20 percent of annual capital expenditure in unserved or underserved areas. In Malaysia and the Phillippines, the universal service obligation (USO) aim is built into the licensing of full-service/multiple-service carriers which are required to construct local lines as well as develop a variety of other services. Other countries, including Australia, Hong Kong SAR, and Taiwan-China, require telecommunication service providers to contribute a percentage of revenues towards the incumbent's universal service obligations.

(3) Tariff Control Prior to the 1980s in the U.S., tariffs were mainly controlled through rate of return regulation (RORR). This form of regulation focuses on limiting profits by specifying a maximum rate of return the investor can earn on the capital required to provide the telecommunication services. The RORR can be divided into three basic steps: (1) The firm's costs are reviewed, and costs deemed to be unnecessary are eliminated; (2) A rate of return

22F or an extensive analysis of issues related to funding universal access, see International Telecommunication Union (1998c).

32

judged to be fair for the firm is specified; and (3) Prices and their structure are set to generate enough revenue to cover costs and provide a fair rate of return. 23 However, the cost-plus nature of rate-based regulation provides weak incentives for technical efficiency, while it can create incentives to overinvest in capital or other items covered by the rate base. 24 In most countries with privately owned monopoly providers, such rate-based price control has been used to control the incumbent's profit. In the emerging competitive environment, a key purpose of price controls is to discourage the dominant carrier from abusing its market power and exercising anti-competitive pricing strategies (predatory pricing). A common feature of price control in the Asia-Pacific region is that prices in fixed-line services are fixed at the same level for all operators, whereas operators in mobile cellular services are allowed greater flexibility in pricing. Another feature is that, in basic services, rates have to be authorized by the regulator or the ministry, and that operators must obtain approval of rates every time a change is made. Service pricing in these segments is not only closely regulated and rates more rigid, but the approval procedure for tariff changes can be complex and lengthy. In Korea, for instance, service rates are agreed upon by the Ministry of Information and Communication (MIC) following formal discussions with the operators involved and consultation with the Ministry of Finance and Economy. Such a tight price control as a method of controlling market power is often criticized for it provides little incentive for operators to improve services or reduce costs. Also, the lack of transparency in the process raises concerns over fair competition. One of the other methods employed to control price and competition in the region is to put the incumbent under a price cap regime. The idea behind price regulation is to control the prices charged by the regulated firm, rather than its earnings. 25 This approach is intended to

23For a comprehensive analysis of rate of return regulation, see Berg and Tschirhart (1988). 24The latter incentive is the so-called Averch-Johnson effect. Conversely, of course, less attractive or less secure returns can be expected to lead to under-investment in capital. See Smith and Klein (1994). 25For a full analysis of price cap regulation as an incentive regulation, see Sappington and Weisman (1996).

33

create strong incentives for efficient performance: with fixed prices, profits are increased by the firm reducing its costs. The price cap regulation introduces a degree of automaticity to price increases, and may thus relieve some of the political difficulties associated with regulators approving regular price increases. 26 In Australia, the incumbent Telstra operates under a price cap regIme. Another sensitive pricing issue associated with the rise of competition is rate rebalancing. Many countries in the region derive more than half of their revenues from international services. Tariff rebalancing has been less dominant outside the ED countries, but since rebalancing would inevitably see local tariffs rise, the political consequence of which are not attractive.

6. Conclusion In this paper, with a view point of organization theory, I have attempted to consider both normative and positive aspects of the telecommunication reforms undertaken in the AsiaPacific region. Even though policy initiatives vary depending on the economic characteristics and the institutional endowments in each country, the main common telecommunication issues addressed in the reforms have been as follows: (1) the introduction of competition into local markets; (2) the separation of regulation from operational functions to obtain the desired telecommunication environment; and (3) the extent of ownership changes with respect to existing public telecommunication operators. However, where the Asia-Pacific region departs from the other regions is in the introduction of limited or state-controlled competition and the nature of ownership reforms. In most of the countries, the introduction of competition into basic telecommunication services has been managed in such a way that growth of an incumbent telecommunication operator is protected from direct competition or uncontrolled competition, in particular from overseas competition. Also many countries in the region have promoted non-traditional privatization

26However, it is difficult to establish a productivity offset term (or a specified rate). Judgment needs to be made on the likelihood of achieving cost reductions in the firm over a relatively long period.

34

schemes so that the private investment is allowed in the sector while the governments retain majority control. In addition to the region's legacies of legal restrictions on ownership and a strong state control in the sector, some cultural and historical factors are also associated with another distinctive aspect of the sector in the region--the arbitrariness in the administration of laws and the allocation of resources. Compared to most developed societies, societies in the region have been lacking independent civil institutions through which social matters can be debated. This heightens the potential role of the state as the arbiter of social issues. In most of the countries in the region, policymaking and policy administration have been frequently unclear. In the absence of transparency or precision of regulatory rules, it often remains unclear which government agency is responsible for what, where, when, and how a particular decision was made, or indeed if a decision was made at all. This clearly adds political risk to telecommunication investment which may already carry substantial commercial risk. In the context, the insulation of regulatory functioning from political process appears to be one of the most difficult goals for the governments in the region to achieve. An analysis of regulatory reforms involves more than studies of specific regulated industries or of administrative procedure, although they are essential. Rather, its central focus should be on the characteristics and consequences of rules and institutions governing them. Also a regulatory reform can be viewed as a bargaining process in which market participants form coalitions and negotiate over regulatory policies and their implementation. Particularly in administrative regulation, the process of public rule-making hearings plays an important role in information gathering by agencies and in adversarial interaction by competing interest groups. For that reason, particular characteristics of administrative regulation in each country need to be more emphasized in future studies.

35

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