Transcript Slide 1

Price Controls and the
Telecommunications Sector
By
Mahendra Reddy,
Chair, Fiji Commerce Commission
And
Dean, College of Business, Hospitality and
Tourism Studies,
Fiji National University
Introduction
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Price Control is a tool of Competition Law and
Policy.
Competition law and policy is a relatively new
initiative in the Pacific Island States.
In Fiji, the regulatory body was established in
2000.
The Fiji Commerce Commission, which is the
competition authority and price regulatory
body, was established with the general
objective of protecting the consumers and
promoting effective competition in Fiji’s market.
Key Objectives of Commerce
Commission
Promote efficient competition in the interests
of consumers and producers.
Ensure
non-discriminatory
access
to
infrastructure facilities in monopoly or nearmonopoly situations.
Promote compliance with the Commerce
decree 2010 to protect consumers through
education, investigation, and where necessary,
litigation.
Key Objectives of Commerce
Commission
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A major focus of competition law and policy is
the avoidance of market dominating behavior
of business through, inter alia, price fixing or
market sharing cartels, abuses by leading
firms and undue concentration.
It is to promote competition as a means of
assisting in the creation of markets
responsive to consumer signals and ensuring
the efficient allocation of resources in the
economy and efficient production with
incentives for innovation.
Price Control: Is it Necessary?
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In some economies, as they attempt to move towards less
regulation and liberalization, they note that certain sectors
of the economy need regulatory intervention for several
reasons, particularly due to market failure.
Market’s fail because of:
 Natural monopolies;
 Small Market size;
 Government policies (such as licenses and quotas)
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Furthermore, in the absence of competition law, the
persistence of entry barriers to many markets, can be an
important deterrent to entrepreneurship and the mobility of
capital.
Price Control: Is it Necessary?
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Natural Monopolies: Small island countries
like Fiji have a range of natural
monopolies.
A large number of them has arisen as a
result of government corporatization and
privatization.
These continue to distort the market
solution.
Price Control: Is it Necessary?
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Market Size: The small market size also does not
allow entry of too many players into industries
which will require large capital investment.
Incumbents also restrict the entry of new players
in a number of ways:
• By engaging in predatory pricing
• By foreclosing the market before a new
entrants enters the market.
• Governments Licenses, Quota’s and Tariff
Protection: This also leads to a distorted
market solution
•
Need for Intervention
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Hence Competition authorities have no
choice but to:
• Ensure market foreclosure is prohibited;
• Ensure established firms do not engage
in predatory pricing to drive out the new
entrant from the market; and,
Need for Intervention
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Ensure those new entrants having de
minimus market share are protected for
certain period until they get a strong foot
hold in the industry.
Ensure monopolies and those firms
which
are
dominant
or
have
substantial market power do not
abuse their power.
• => Price control
Price Control: A Temporary Solution
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Price control are, generally, not an
efficient solution.
Price signals are the single most important
beacon in the market that will ensure
resources are allocated efficiently;
Price signals will attract investors in a
sector where they can make surplus and
re-invest thus expanding the economy.
What does the Business Sector in Fiji want!!
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Do they want a purely competitive
market?
Do they want no price control?
Neither...they want a policy of
convenience.
They want no price control in the product
market.
But they want price control in the factor
market.
What does the Business Sector in Fiji
want!!
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They don’t want control of prices in the
product market but they want tariff
protection
They want high tariffs to be imposed on
imported competing products so that they
can raise their product price in the
domestic market.
What does the Business Sector in Fiji want!!
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They want the finished product to be
imposed
a
tariff
rate
while
their
importation of unfinished product to have
no tariff.
They want tax free zones thus attracting
inefficient factories to operate in these
zones
What does the Business Sector in Fiji want!!
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Electricity:
They
want
the
Commission deny FEA a tariff rate
commensurate with a market rate of
return…
They made a long submission to the
same Commission who said FEA cant
bill the consumers for FEA’s Capital
Cost and that Commission should
regulate FEA.
What does the Business Sector in Fiji
want!!
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When Fiji Ports Authority increased the
Port Charges, the importers and
exporters ran to the Commission
arguing that FPL is abusing their
monopoly power and thus we must
intervene and set their charges.
The Commission intervened and have
set their charges. Both parties are
happy.
What does the Business Sector in Fiji
want!!
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AFL: When AFL started to increase
rent of the floor space at Nadi, the
tenants there ran to the Commission
to intervene…that AFL is abusing
their monopoly power and thus
charging exorbitant rent.
The Commission then researched
and set the rates early this year and
all parties are happy.
What does the Business Sector in Fiji
want!!
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Port Denarau: When Port Denarau
increased its passenger levy, the
cruise owners ran to the Commission
arguing
that
they
will
be
finished….the Commission intervened
and have set the levy.
What does the Business Sector in Fiji
want!!
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FINTEL: When FINTEL was refusing to allow
any other telecom operator to purchase
bandwith directly from the SCCN, the
operators ran to Commission to regulate the
bandwidth charge as FINTEL was the sole
provider of Bandwidth and was thus levying
exorbitant charges.
The Commission intervened and has not only
set the bandwidth charge bringing it down on
a sliding scale, the Commission has also
opened up the gateway. Any operator can
source bandwidth directly from the SCC
network.
The reality in Fiji is….
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We have monopolies that are abusing
their
power
and
distorting
the
competitive market solution.
We have dominant firms who are
setting prices and deciding on output
thus distorting a competitive market
solution.
The reality in Fiji is..
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We have incumbents in the market
who, in the advent of entry of a new
player will foreclose the market by
entering into long term contracts.
We have well established players in
the market, with a diverse range of
products (to cross subsidize losses),
who engage in predatory pricing to
drive out a new entrant from the
market.
The reality in Fiji is..
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Some of those who have become
well off in Fiji and PICs have largely
acquired
their
wealth
due
to
government-created
monopoly
positions through, for example,
restricting trade and investment, or
from
privileged
positions
in
parastatal organisations.
The reality in Fiji is..
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Therefore, in Fiji and PICS there is a
virtual absence of a full commitment
to a fully competitive market.
There will be continuous lobbying
with governments…line Minister and
Prime Minister to:
• Impose
• Provide
• Provide
• Provide
controls on the factor markets;
tax free zones;
tariff protection;
tax concessions on imported
Commission is Clear on its
Position
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Competition is paramount.
Competition must be allowed where market
structure permits.
Where markets fail, and if the goods within the
market either could cause hardship and become
an impediment to volume based surplus creation
and economic growth, the Commission must
intervene.
Where market structure is distorted to lessen
competition, the Commission must intervene.
Do we really have a regulated
Economy
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No not really;
Most of the sector’s have no price
control at all;
Pharmacies: 20% of their products
are under price control;
Supermarkets: 15% of their products
are under price control;
Hardware: 30% of their products are
under price control.
ICT and Growth
ICT Development in Fiji
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Growth theory has expanded over the last two
hundred
years
with
addition
of
new
contributions on key variables affecting growth
and development of an economy;
Over the last four decades, technology has
been seen to be a critical factor defining
countries going beyond their normal potential;
Another factor that releases people's creative
potential and knowledge is Information and
Communication Technologies (ICT).
They
do
not
by
themselves
create
transformations in society. ICT are best
regarded as the facilitators of knowledge
creation in innovative societies.
Introduction: ICT Development in
Fiji (cont…)
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The ICT sector has a powerful multiplier effect
in the overall economy.
Policy makers in Fiji have long back realised the
potential of ICTs for development, and
recognize that ICTs can be harnessed for great
socio-economic benefits.
An
important
sector
within
ICT
is
telecommunications sector;
Fiji’s ICT sector showed first signs of making
this contribution to the economy in the 1990
after several major developments.
Introduction: ICT Development in
Fiji (cont…)
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First was in July 1994 when Vodafone
(Fiji) Limited (“Vodafone”) entered Fiji by
introducing
cellular
mobile
telecommunications
systems
and
associated networks and to provide
cellular
mobile
telecommunications
services in Fiji.
In 1999 when FINTEL invested to land
the Southern Cross Cable Network into
Fiji, it was the beginning of another era
for
Fiji
with
respect
to
telecommunications development.
Introduction: ICT Development in
Fiji (cont…)
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With the conclusion of the Deed of Settlement
in 2008, Government was able to license Digicel
(Fiji) Limited (“Digicel”) to operate cellular
mobile
telecommunications
systems
and
associated networks and to provide public
cellular mobile telecommunications services in
Fiji.
However, despite these developments, there is
still room to further increase ICT penetration
and reduce ICT prices.
With this market situation, Fiji is missing the
benefits that a more competitive telecom
market would provide such as low costs of
doing business, getting education and in
communication.
Introduction: ICT Development in
Fiji (cont…)
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Compounding this is the high initial capital
investment that this sector requires;
High capital costs is an impediment to
investment in this sector as well as recipe for
high wholesale and retail rates.
The question that arises then is can
infrastructure sharing be the answer?
Infrastructure sharing is an arrangement
whereby one telecommunication carrier shares
their telephone infrastructure with one (or
more) other carrier(s).
Introduction: ICT Development in
Fiji (cont..)
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In case of industry’s which requires huge
Capital investments, the challenge is to
optimally utilize available resources while
ensuring competition and availability of services
at affordable prices.
It is expected that advantage of such
infrastructure sharing will be passed on to
subscribers in terms of faster roll-out of
services and greater affordability of services.
It is useful in start up phase to build coverage
quickly and in the longer term scenario to build
more cost effective coverage in un-serviced
area.
What is the economic theory and legal basis for
it?
Theoretical Basis: Service vs Facility Based
Competition and the Ladder of Investment
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Sectors requiring large scale industry specific
investment can lead to monopolisation.
As such, firms rolling out new infrastructure
may be obliged to share them with others by
subjecting them to access regulation.
Normally it is difficult for a firm to roll-out its
own infrastructure on a large scale to compete
with incumbent operators.
Thus the first stage of the competition
development has been largely based on strict
access regulation.
Theoretical Basis: Service vs Facility Based
Competition and the Ladder of Investment
(cont…)
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The regulation forcing the incumbents to lease
their facilities to the entrants, at a nondiscriminatory and cost-oriented tariff-has
facilitated the emergence of competition.
Once established on the market, some of the
new entrants can then roll out their own
infrastructure thus leading to facilities based
competition.
This notion of service and facilities based
competition is related to the concept of the
ladder of investment”.
Theoretical Basis: Service vs Facility Based
Competition and the Ladder of Investment
(cont…)
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The underlying notion is that this approach will
motivate alternative operators to invest in
infrastructure in order to take advantage of less
complex, and therefore cheaper, access
products of the incumbent.
In the initial period of competition-creation,
regulatory obligations enabling new providers
to access wholesale services and to resale them
are justified by the goal of attracting new
service providers to the market, reducing retail
prices, increasing immediate consumer benefit
and the utilisation of existing infrastructure.
Theoretical Basis: Service vs Facility Based
Competition and the Ladder of Investment
(cont…)
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It is assumed that regulation should motivate
alternative operators to move up the ladder and
deeper into the value chain, adding more and
more of their own infrastructure elements,
which normally requires new investments. It is
assumed that this should result in the
development of infrastructure competition.
The savings that the ICT operators make in
building new ICT system and networks can then
be used for the development of new and
efficient telecommunication services in order to
improve their competition situation.
Infrastructure Sharing in the
Telecommunications Sector: Essential
Facilities Doctrine
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The doctrine of essential facilities evolved in the
United States in the beginning of the 20th
century.
Certain railroad companies owned both the
railroad terminal as well as the only bridge link to
the terminal. A new player, intending to provide
competition to the existing players, was denied
access to both the bridge as well as the railroad
terminal.
The existing players argued that the new player
needed to build similar facilities and incur the
relevant cost to be able to complete.
Infrastructure Sharing in the
Telecommunications Sector: Essential
Facilities Doctrine cont…
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The US Supreme Court in the case of US vs.
Terminal Railroad Association of St. Louis,
[(1912) 224 U.S. 383], held this as a case of
monopolization, and directed the existing players
to provide access to essential facilities - namely,
the bridge and the railroad terminal - to enable
the new player to compete effectively.
However, it is important to note that the
essential facility doctrine is not construed as to
mean that any investment made by an
entrepreneur would be subjected to third party
access, since such a legal regime would
discourage any potential investor.
Telecommunications Examples:
Selected Ones
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USA: Telecommunications in the USA is
regulated by the Telecommunications Act
1996, which contains requirements for
both
co-location
and
infrastructure
sharing.
France:
ART
(Autorité
de
Régulation
des
Télécommunications)
also
favoured
sharing of 3G infrastructure between
service providers, as long as they don’t
share frequencies.
Telecommunications Examples:
Selected Ones (cont…)
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Germany:
In
Germany,
the
regulator
RegTP
(Regulierungsbehörde für Post und Telekommunikation) ruled that
infrastructure sharing of wireless sites, masts, antennae, cables,
combiners and cabinets was permissible – provided that full legal
control of the networks and competitive independence remains
intact.
Brazil: National Telecommunications Agency (ANATEL) laid the
rules on infrastructure sharing among telecommunications service
providers. The rules set out the conditions and standards for
sharing of ducts, conduits, poles, towers and utility easements in
the telecommunications sector.
Telecommunications Examples:
Selected Ones (cont…)
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Norway: The different networks in Norway can
share most of the infrastructure. Masts,
antennae, power supplies, housing, transmission
routes etc. can be shared. The core network
cannot be shared. The frequencies cannot be
shared.
Trinidad and Tobago: TATT has attempted to
prevent the proliferation of cellular towers
throughout the country by mandating collocation
(tower sharing) in the concession granted to
cellular providers. The operators who availed
concessions are required to share where the
same is technically feasible
Summary and Conclusion…
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Price controls are here as a
temporary solution.
Price controls are on goods and
services are not provided via a
competitive market and these
goods and services are critical for
the social well being as well as for
economic growth.
Summary and Conclusion…
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The Commission has too date undertaken
numerous work to ensure:
• hardship on the general population is lessened
as result of distorted market structure;
• Impediments to volume based surplus creation
is removed and growth promoted;
• Price control remains in force until market can
deliver the desired solution;
Summary and Conclusion…
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Infrastructure
sharing
in
the
telecommunications
sector
in
many
countries has proven to be a critical lever
contributing to the growth of the telecom
sector.
Operators should closely examine the
economic benefits and develop their
internal positions on the subject.
The
next
major
work
in
the
telecommunications sector should be on
this area and that’s in the domain of TAF.
The End
Vinaka and Dhanyavad !!