All around the globe, developing countries are loosening governmental controls and opening markets to competition. Nowhere, perhaps, is this trend more prominent than in the burgeoning telecommunications industry, where the explosion in data access and digital technology brings the global village predicted by visionaries like Arthur C. Clarke and Buckminster Fuller closer to reality.
The symbiotic relationship between the emergence of developing countries and the expansion of digital telecommunications technology must be managed properly to maximize the power of telecommunications-the power to bring basic services and information to the masses, create jobs and investment opportunities, foster competition and, ultimately, contribute to overall economic growth.
This article examines the policy, regulatory and licensing issues that developing countries should consider in privatizing and liberalizing their telecommunications industries. Privatization generally refers to the transfer of all or a portion of a state-owned monopoly to the private sector. Liberalization generally refers to the process of bringing competition to the incumbent monopoly provider. As developing countries move in these directions, they should keep in mind several guiding principles.
First, when structuring laws and rules, the focus should be first and foremost on the underlying policy objectives. These objectives may be different for different classes of licenses. For example, for basic services such as telephony, the transfer from the state to a monopoly provider may be appropriate. For paging or mass media services, it may be appropriate to establish specific entry criteria to promote competition. Second, the country will need to establish a regulatory structure for spectrum management, licensing and enforcement. In order to encourage and sustain investment and contribute to the country’s economic stability, the regulatory environment must be reliable, stable and transparent. Third, the license allocation scheme for each class of license must support the policy objectives and regulatory structure.
Policy objectives
A developing country may have several policy objectives it seeks to advance as it privatizes and liberalizes. Depending on its existing infrastructure, providing basic services to all or certain portions of the country may be the most critical objective. In implementing this policy, there may be a greater need to encourage participation by foreign companies having operational expertise and technological know-how. Foreign investors may insist on some level of control or an exclusivity period and, above all, a regulatory process that is transparent and fair.
In this regard, the 1997 World Trade Organization Telecommunications Agreement states that if a country permits foreign participation, it should do so on a nondiscriminatory basis that affords foreign suppliers the same opportunity to interconnect with or access public networks as the national provider.
To encourage long-term investment, the country may want to permit the basic service provider to enjoy an exclusivity period, and should adopt pricing restrictions that allow the operator to realize a certain minimum rate of return on its investment. Construction benchmarks and coverage requirements may be effective tools to ensure that basic services are brought to market rapidly and ubiquitously.
In other countries, or for certain classes of services that are not yet competitive, the developing country’s goal may be to promote competition. The country should consider whether the competition should be spectrum-based, with multiple players licensed to use particular blocks of spectrum for particular uses, or market-based, with licensees permitted to use spectrum for the highest-value use, which they determine. A careful balance must be struck between the rights and expectancies of incumbents and the incentives new competitors will require. For instance, in some circumstances it may be appropriate to afford incumbent monopolies a preference in new spectrum to permit facilities to be upgraded or packaged with existing services. In order to preserve competition, rules may be required to limit the transfer of licenses to competitors.
Another objective may be to generate as much money as possible for the government in order to fund other business sectors. In this scenario, licenses would be sold to the highest bidder, creating incentives for the buyer to rapidly construct and operate services in order to obtain a return on its investments. Auctions are subject to collusion and rigging, which must be policed. Another drawback to this scheme is that domestic companies may not have sufficient capital or expertise, resulting in greater participation by foreign companies. Rules designed to encourage domestic investment must be balanced appropriately to encourage domestic participation without detracting from the benefits that foreign expertise can bring.
Diversity of ownership may be another policy objective. Also, a developing country may want to encourage education and research by setting aside spectrum for noncommercial purposes, much in the way the United States has done with public television and public radio. In any consideration of policies, spectrum efficiency also is critical. In order to maximize the value of the spectrum, allocations must be made with full knowledge of the present and future abilities to deploy non-interfering services in various band segments, taking into account such factors as topography, climate and cross-border spectrum plans.
Regulation
Once policy objectives have been identified for each class of service, the next question is how to implement and support those policies via regulation and licensing. In adopting a regulatory scheme, developing countries should consider several mechanisms.
The use of entry criteria and eligibility requirements can be effective tools to manage levels of foreign participation, limit ownership concentration, curb procedural abuses and encourage expeditious buildouts. For instance, if the underlying policy objective for a particular class of license is to foster competition, a greater level of foreign ownership and ownership caps would be appropriate. In order to implement ownership restrictions designed to control market concentration, the country should consider adopting prohibitions on price fixing and exclusive arrangements, restrictions on mergers and requirements of separate subsidiaries for manufacturing and service components.
If the country desires to rapidly deploy basic services, the disclosure of a business plan and a demonstration of financial wherewithal would support this policy. For some classes of licenses, it may be appropriate to impose restrictions on the permissible uses and types of services of the spectrum which, although potentially decreasing the value of the spectrum, could stimulate policies designed to ensure that educational and other noncommercial services are provided. Also, rules must address the need to provide service to the public, with particular emphasis on public access to telephony networks and pricing.
In addition to supporting the overall telecommunications policy, regulations must fairly take into account geography, the scalability of the technology, economic conditions and economic theory. Depending on the limitations of the spectrum, in a large, densely populated country, it may be best to allocate regional or local spectrum rights, whereas smaller countries may be able to award nationwide licenses. Certainly, the class of service also will dictate the geographic parameters of spectrum rights, as will the relative urgency to deploy services rapidly.
Licensing mechanisms
After policy considerations for each class of service have been identified and regulations have been established to promote those policies, the next step is to allocate licenses for spectrum rights. There are three traditional model
s: comparative analysis, lotteries and public auctions. It is importan
t to consider the costs and benefits of these licensing schemes in the context of the policies that are being promoted.
A comparative analysis requires the regulator to establish objective criteria to select from among more than one party vying for the spectrum rights. Examples of these criteria include financial wherewithal, management experience, technical know-how and buildout commitment. These criteria can be used to promote other policies, such as minority, gender or ethnic participation, which also can encourage sincere applicants. Comparing applicants requires substantial administrative resources, and it is often difficult to establish objective criteria. Also, the selection process is time-consuming, and the regulator will need to engage in post-licensing oversight, such as construction benchmarks, to ensure the service plan is being implemented in a timely manner.
In a lottery system, the regulator establishes a date for all applicants to submit applications, with the licensee chosen by random selection. Following the lottery, the winner would then submit a more detailed service plan. Lotteries have proved to be an expeditious means to award licenses and, if properly implemented, a weighting system can be used to give preferences to applicants that propose to serve identified policy goals. For instance, if a country wants to encourage diversity in ownership of a particular class of license, an applicant could be given a lottery preference designed to increase its odds of being selected. Other than filing fees, lotteries do not generate revenues and often attract speculators interested in churning their licenses for a profit. This results in warehousing of spectrum and service initiation delays. For these reasons, lotteries require substantial post-licensing regulation.
In recent years, both in the United States and abroad, auctions have become the favored means for allocating spectrum rights. In this scheme, the regulator sets a date for the submission of entry cards establishing some minimal eligibility requirements. Bidders then compete for the license, with the winner being the party that assigns the highest value to the spectrum. Through a system of credits and discounts, other policies can be advanced.
As an example, the United States has awarded discounts and financing plans to qualified small-business applicants to encourage entrepreneurship and ownership diversity. Auctions can be conducted quickly, and the financial investment made by the high bidder will encourage rapid construction and operation of the facilities. Without appropriate spectrum caps or similar restrictions, ownership of communications facilities could become concentrated in a small number of large companies. Of course, while necessary in some circumstances, the imposition of these restrictions, as well as anti-collusion rules, will adversely affect the value of the spectrum.
Conclusion
There is much for a developing country to consider when it liberalizes and privatizes its telecommunications industry. One size does not fit each country, each policy or even each class of service. The result will be a regulatory mosaic, with compromises in policies, regulations and licensing schemes required to establish the appropriate framework. But regardless of the policies, regulations and licensing schemes ultimately implemented, the overall structure must be fair and predictable for the true benefits of privatization and liberalization to be realized.
Stephen E. Coran is a principal in the Washington, D.C., law firm of Rini, Coran & Lancellotta P.C., which represents traditional media, telecommunications and new media interests. This article is adapted from a presentation made at The World Bank.
