Challenges to regulating telecommunications in a free market
THE liberalisation of the telecommunications sector passed another important milestone last week with the formal ending of the monopoly of Cable and Wireless Jamaica (CWJ) on international telephony, thus starting a new era of competition that promises tremendous benefits for consumers and the broader economy.
The Office of Utilities Regulation (OUR) believes the Jamaican market for international voice and data traffic is currently about 600 million minutes a year. Assuming a value of $10 a minute, that represents gross revenue of J$6 billion – small wonder many players are lining up for a share.
First off the mark was cellular market leader, Digicel, which launched its own international satellite service on March 1 – the exact date when all telecommunications services, including international telephone voice services, became subject to competition.
Next up, according to OUR director-general, J Paul Morgan are the 22 applications for carrier licences and 14 for service provider licences which the OUR will begin to consider on Wednesday next.
These new entrants will generate increased competition in international telephony which will, in all probability, bring down costs to consumers even further than the levels achieved in recent months of competition between CWJ and Digicel.
Not surprisingly, Phillip Paulwell, minister of commerce, science and technology, along with industry players and regulators made the round of talk shows and press interviews last week, to herald the latest chapter in the liberalisation story. But it was also clear that there were uncertainties ahead.
These include domestic telephone and Internet rates; the price and the pace at which new entrants get connected to the networks of both CWJ and Digicel; consumer protection in an aggressive and volatile marketplace; bridging the ‘digital divide’; and ensuring that the gains from telecommunications are better incorporated into national policy and economic development.
Liberalisation began in March 2000, when the government and CWJ agreed to terminate CWJ’s 25-year renewable monopoly (granted in 1988). In phase one, mobile licences were granted to Digicel for US$47.5 million and to Centennial for US$45 million. Phase two, which ended February 2003, allowed expansion in Internet and other services. Now, the market rules.
Liberalisation of the mobile sector led to unexpected growth of the mobile market from 330,000 lines in March 2001 to just over 1.3 million by the end of 2002 with Digicel accounting for 650,000, CWJ 600,000 and Centennial 50,000. There has also been the accompanying economic boom in the sale of prepaid cellular phone cards, construction and maintenance of cell sites.
Will this experience be repeated in the next phase? The answer is obviously unclear but it could depend, in part, on how some of the regulatory issues are addressed in a free market environment.
One concern is that domestic rates are not likely to come down soon. For starters, CWJ is expected to be a virtual monopoly in fixed-line service for some years to come, despite the entry of Go-Tel into the market with its ‘fixed wireless’ service.
The other issue relates to a long-standing CWJ practice of inflating the charge for international calls and using part of the earnings to subsidise domestic rates. The practice meant that most of the calls between the US and Jamaica originated in the US, resulting in CWJ receiving substantially more from US carriers than it was paying out, creating an imbalance in trade.
Since the 1990s, the US Federal Communications Commission (FCC) has been pressuring Jamaica and other developing countries to ‘re-balance’ telephone rates to bring greater parity between international and domestic rates. One FCC study concluded that in 2000, Jamaica was “by far the highest per capita recipient of net settlement payments” from among 13 countries which traditionally earned much more from US carriers than they paid out.
The average net per capita settlement for these countries was US $4.37 compared to US$35.10 for Jamaica.
The OUR boss says CWJ still has a few years to complete the ‘re-balancing’ process. So, unless factors such as competition or new technology are brought to bear on the situation, domestic fixed line rates are not likely to trend down at the same rate as international rates.
This could have a negative effect on Jamaica’s attempt at accelerating Internet usage, according to Patrick Terrelonge, the chief executive officer of InfoChannel, the Internet Service Provider which, for several years, has led the legal and business challenge to CWJ’s monopoly.
Against the background of the 65 per cent hike in local telephone calls from last November 1, Terrelonge was reported as urging the authorities to consider either a flat rate “or another suitable system” to avoid negative impact of the increase on Internet access.
On the issue of new entrants being able to connect to the networks of Digicel and CWJ at the time and the price they would wish, Morgan admits that there may be some bumps along the way but, with the OUR experience in connecting Digicel and Centennial and Go-Tel to CWJ network, he does not believe these will be insurmountable.
A more pressing issue may very well be consumer concerns when the marketplace gets more crowded and aggressive. How do you protect the consumer in a “small and sensitive market where affordability is a key issue”? he asked rhetorically in an interview Friday.
Part of the answer is that the OUR will have to do the requisite ‘due diligence’ to ensure that the principals in the new businesses are “fit and proper”. Related government agencies like the Fair Trading Commission and the Consumer Protection Division must ensure that advertising, marketing and pricing strategies are supportable by real performance.
But, as always happens when many players seek to exploit a new business opportunity, there will be the inevitable market failures. Some companies will go bankrupt and fold up.
But when a low-income person in Jamaica is left holding a $2,000 calling card or a small business finds itself without telephone service because the provider has gone out of business, the issue takes on another dimension.
“We have to find a way to put the consumers in a position to protect themselves” and also work towards a situation where there could be “a seamless transfer” of the accounts from a failed business to a going concern, Morgan commented as he contemplated some of the potential challenges in the new environment.
Claude Robinson is senior fellow in the Research and Policy Group, Mona School of Business at UWI. kcr@cwjamaica.com