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ITFP HE8342 .R47 1989 c.2Wellenius, Bjorn.Restructuring andmanaging theta1 Prnmmiin Ir finnc

Restructuring and Managingthe Telecommunications Sector

A World Bank Symposium

Restructuring and Managingthe Telecommunications Sector

Edd byBjom Wellenius, Peter A. Stem, Timothy E. Nulty, and Richard D. Stem

The Wodd BankWashngton, D.C.

01989 The International Bank for Reconstructionand Development / THE WORLD BANK1818 H Street, N.W., Washington, D.C. 20433, U.SA.

All rights reservedManufactured in the United States of AmericaFirst printing May 1989Fourth printing January 1994

The findings, interpretations, and conclusions expressedin this study are entirely those of the authors and shouldnot be attributed in any manner to the World Bank, to itsaffiliated organizations, or to members of its Board ofExecutive Directors or the countries they represent

Library of Congress Cataloging-in-Publication Data

Restructuring and managingthe telecommunications sector

(A World Bank Symposium)Based on a seminar held in Kuala Lumpur, Malaysia,

Nov. 17-19, 1987.1. Telecommunications-Asia-Congresses. 2. Tele-

communication policy-Asia-Congresses. 3. Telecommuni-cation-Congresses. 4. Telecommunication policy-Con-gresses. 1. Wellenius, Bjom. II. International Bankfor Reconstruction and Development. III. Series.HE8342.R47 1989 384'.041 89-5MISBN 0-8213-1198-0

Foreword

As economic activity reaches a global scale and be- jointly organized by the World Bank and the Common-comes critically dependent on vastly expanded flows of wealth Telecommunications Organization. After the firstinformation, telecommunications is acquiring strategic two, which had focused mainly on management prob-importance for economic growth and development. At lems of telecommunications enterprises, the need forthe same time, rapid innovation in telecommunications a meeting on broader sectoral issues became evident.and information technology is lowering costs, creating This seminar eloquently confirmed the developingnew services and ways of delivering traditional services, countries' interest in structural change and in the de-and changing the cost structure of many other in- veloped countries' experience.dustries. In response to these forces, most developed The World Bank and the Commonwealth Telecom-countries are now at some stage of restructuring their munications Organization hope that the wide distribu-telecommunications sectors. A growing number of de- tion of the material included in this volume will stimu-veloping countries, recognizing telecommunications late further thinking and discussion on this veryas a key element of economic development, are looking important subject, the impact of which by far tran-into reforms that may also help overcome persistent scends the telecommunications sector. Both organiza-shortfalls in telecommunications investment and per- tions stand ready to facilitate such reflection.formance. And intemational development organiza-tions have in recent years broadened their approach to Attila Karaosmanoglutelecommunications to include the examination of a Vice President, Asia Regionwide range of sector policy issues and options. The World Bank

This volume reflects the considerable attention thatthese issues and options have received in countries of Maurice Gilhamvery different economic conditions. The seminar on Chairnanwhich this publication is based was the third in a series Commonwealth Telecommunications Council

Contents

Preface xi

1. Structural Change in Telecommunications IBjbm Wellenius and Peter A Stem

PARTL THE CHANGING WORLD OF TELECOMMUNlCATIONS 7

2. Emerging Issues in World Telecommunications 7Thnonthy E. Nulty

Pressures on the Telecommunications Sector 7Implicatons for Developing Countries 10ssues of National Policy 11

Isues of Sector Structure 14The Nature and Role of the Dominant Telecommunications Entit 16Conclusions 17

3. Models of Service Competition in Telecommunications 19Karl-Heinz Neumnn

Services versus Facilities Competition 19Potential Options for Service Competiton 20Models Observed in Practice 21Economic Characteristics of Telecommunications Services

and Service Competition 23Conclusions 26References 26

4. Regulatory Policy for Telecommunications 28Timothy E. Ndit and Eric Schndeirlde

Rdorms under Consideration by Dewloping Countries 28Four Principal Regulatory Activities 30The First Case: Regulating a Single Publicly Owned Monopoly 32The Second Case: Regulating a Snle Privately Owned Monopoly 34The Third Case: Regulat Several Public and Private En 35Orgaizational Structure nd Sbffing of a Regulatory Agency 37

PART H. TIl EXPBRJBNCE OF NDWL4L COUNTNS 41

5. Op and Developments in the Telecommunat Sector 43Robet Bruce

Etnl Facton That Affect National Polit OpIons

vii

vli m

National Policy Options: The Response to Pressure 46The Intemational Impact of New Policies 52The Experience of Industrial Countries and Its Relevance to the

Developing World 52Conclusions 54

6. The Privatization of Telecommunications in the United Kingdom 55John A. C. King

The Political Background 55The Phases of Change 56Assessment So Far: Stakeholders 58Conclusions 60

7. Deregulation of Japan's Telecommunincations Businessand the Role of Kokusai Denshin Denwa 61

Nobuyoshi Mutoh

Japan's Telecommunications Business under the Law 61Current Status of Kokusai Denshin Denwa 64KDD Policy in the Face of Intemational Competition 65Conclusions 66

8. Privatization and Reorganization of Nippon Telegraph and Telephone 67Toru Uehara

The Situation after Privatization 67Conclusions 69

9. New Zealand: From Post Office to Telecommunications Corporation 70Donald R. Murphy

10. The Australian Perspective 73Mel K. Ward

The Historical Context 73The New Context 74The Challenge to Govemment and Carriers 75Conclusions 77

11. U.S. Telecommunications Policy: Increasing Competitionand Deregulation 78

Henry Geller

The Causes of Change 78Customer Premises and Network Equipment 80Value-Added Networks 81Transmission Services: Long Haul Toll 81Local Competition 83The U.S. Process 84Conclusions 84Appendix. Examples of 'Value-Added and Information Services 84

PART III. THE EXPERIENCE OF DEVELOPING COUNTRIES 87

12. Beginnings of Sector Reform in the Developing World 89Bjern Wellenius

Telecommunications in Developing Countries 89Alternatives for Sector Development 91Examples from Developing Countries 94Conclusions 97

aWWW k

Appendix A. Jordan Telecommunications Prepare for Sustained Growth 97Appendix B. Sweeping Sector Reforms Considered in Argentina 97Appendix C. Chilean Telephones Privatized 98

13. Phased Privatization with Proposed Foreign Participation:The Sri Lanka Experience 99

Vemon L. B. Mendis

Concept of Privatization 101Legislation 101License 102National Telecommunications Commission 102Tariffs 103Management and Organization 103Development of Human Resources 103Personnel 104Finance 104Foreign Collaboration 104Overall Strategy 105

14. An Indian Perspective on Sector Reform 107T. H. Chowdary

Govermnent as Sole Provider 107Restructuring the Manufacture of Equipment 108Competition in the Provision of Equipment and Services 108Institutions for the Multiple Provision of Services 109Conclusions 110

15. The Initial Experience of the Metropolitan Telephone Corporationof India 111

M. P. Shukla

The Need for Change: Formation of a Telephone Corporation 111Plans of Action 113Factors Contributing to Higher Productivity and Efficiency 116Suggested Measures for Privatization 116

16. Meeting the Challenges of Privatization in Malaysia 118Daud bin Isahak

Background to Privatization 118Incorporation of Telecommunications Operations 119Consolidating the Enterprise 120Preparing for Divestment 121

PART IV. CONCLUSION 123

17. Alternatives for the Future 125Richard D. Stemn

Glossasy 130

Contributors 142

Participants in the Seminar 144

Preface

In response to the winds of change that have swept the exchange of experience on telecommunications sec-through the telecommunications industry worldwide, tor reform among countries. More specifically, readythe World Bank, the Commonwealth Telecommunica- access to the material presented here is expected to fa-tions Organisation, and Syarikat Telecom Malaysia or- cilitate the dialogue both among government authori-ganized a seminar on the management and restructur- ties responsible for telecommunications policy-in theing of the sector. More than sixty participants gathered areas of finance, planning, and economy as well as com-in Kuala Lumpur, Malaysia, on November 17-19, 1987. munication-and with the telecommunications opera-They included chief executives and senior managers of ting entities, major users, potential investors, andvirtually all major Asian telecommunications enter- other key participants in the telecommunications busi-prises (from both industrialized and developing coun- ness. The book may also give international agencies atries) and selected others. better understanding of the role they can play in help-

The seminar's broad objective was to identify key tele- ing address increasingly critical communication con-communications policy issues and to consider alterna- straints on economic and social development. Mosttives for sector development by examining actual exper- chapters are based on the papers presented at Kualaiences in a wide cross section of countries. More Lumpur, and some material has been added (mainlyspecifically, the seminar sought to inform policymakers Chapters 1, 3, and 17).and operators in developing countries and newly indus- The success of the seminar, and this volume, owetrialized countries of the emerging options for telecom- much to people who participated in the conception andmunications sector policy, structure, and regulation. organization stages but were not present in KualaAnother goal was to give these participants the oppor- Lumpur. We particularly thank Steven Ettinger of thetunity to exchange ideas among themselves and to World Bank. Part of the material presented, especiallylearn from the experience of countries (industrialized Chapters 2 and 12, draws heavily on the collective workand developing) that have undertaken sector reform or of the World Bank's telecommunications staff and con-are now embarking on it. sultants; especially valuable contributions were made

The seminar was eminently successful in achieving its to these chapters by Stephen Brushett, Gerald Buttex,objectives. It confirmed the developing countries' grow- Nikola Holcer, Dinshaw Joshi, Rogati Kayani, Hughing interest in new sectoral approaches in the context Lantzke, David Lomax, Shanta Pai, A. Shanmugarajah,of the rapidly changing world telecommunications Mark Tomlinson, and others. The views expressed inbusiness environment and also demonstrated the rele- these pages, however, do not necessarily reflect thosevance of the industrialized countries' experience. of the participating organizations.

The present volume disseminates the knowledge and For excellent local seminar organization and supportlessons drawn from the seminar. In this sense, the book and for generous hospitality we are grateful to Syarikattakes a first step in implementing the seminar partici- Telekom Malaysia Berhad, especially to the chairman,pants' recommendation that the World Bank and other Tan Sri Dato' Dr. Mohd Rasdan Bin Haji Baba, and theinternational agencies step up their efforts to facilitate managing director, Daud bin Isahak, as well as to Mohd

xi

A Preface

Radzi bin Mansor (executive director), Rusli bin Habib Pimpton and to Alain Morissette, director, and Andy(general manager, Telecommunications Training Cen- Lauriston, senior terminologist, Language Services,tre), and many members of the devoted staff. Peter TELEGLOBE Canada, for their kind assistance in prepar-Chang (TELEGLOBE Canada) very ably assisted in the or- ing the glossary of terms in this volume.ganization on behalf of the Commonwealth Telecom- Finally, the organizers and editors express heartfeltmunication Organization. thanks to all seminar participants and authors and to

The editors are also grateful to Robert Bruce, Jeffrey Amnon Golan for his superb chairmanship.Cunard, and Karen Brinkmann of Debevoise and

Structural Change in TelecommunicationsBjom Wellenius and Peter A. Stem

Driven by powerful technological and market forces, profound changes in telecommunications by revisingthe telecommunications revolution has assumed global the policy framework, structure, and regulation of thedimensions. Starting in the United States in the early sector. These developments in tum promote compe-1970s, structural change swept the telecommunica- tition, increase the number of participants in the tele-tions sectors of the United Kingdom and Japan in the communications business, and blur the boundaries notearly 1980s and is now well under way in most only between users and providers but also among thecountries of the Organisation for Economic Co- various types of services offered. In addition theoperation and Development (OECD). The same pressures changes expand telecommunications markets globallyand the beginnings of sector reform have most recently and unleash powerful forces seeking new opportunitiesstarted to appear among developing countries and in worldwide.the Eastem bloc. Where do developing countries stand in this context?

Telecommunications has traditionally been viewed as With few exceptions, in the developing world tele-a natural monopoly and a relatively straightforward communications services are provided by the public sec-public utility. Economies of scale, political and mili- tor. These services yield high economic retums, benefittary sensitivities, and large extemalities made tele- a broad cross section of the population, and are usedcommunications a typical public service. In such mainly for economic production and distribution. Theyan environment, development focused primarily on ex- can also be a profitable business and an importanttending basic services and secondarily on improving source of public funds. Despite the high social and pri-the operational performance of the telecommunica- vate returns, however, developing countries generallytions operating entities. invest too little in telecommunications. As a result

In recent years the situation has changed dramati- there is high unmet demand for basic services, call con-cally. There has emerged a strong business demand for gestion, excessive concentration in a few urban centers,better, more varied, and less costly communications and a lack of the advanced services that are increasinglyservices. This demand reflects the growing importance needed by the modem sectors of the economy. Further-of communication in all economic sectors, the con- more, facilities are often badly maintained and oper-vergence of information and telecommunication ser- ated, so that service quality and reliability are poor.vices, and the globalization of capital flows, trade, These problems are largely traceable to inadequate sec-manufacturing, and other activities. Technological tor policies, a shortage of funds (especially foreign ex-innovation has greatly reduced the cost of information change) for investment, and weaknesses in the opera-processing and transmission and has created new ways ting entities' organization and management.of meeting a wider range of user needs independent of There is evidence that the pressures on the telecom-existing telecommunications enterprises and often at munications sector in the advanced economies arelower cost. increasingly felt in developing countries as well. Conse-

lndustrialized countries, in which these forces first quently, attractive opportunities to deal with theemerged in full strength, are responding to the sector's inadequacies are emerging. Some developing

l

2 Bjom Wellenius and Peter A. Stem

countries are considering alternatives to the traditional structure that was chosen for Japan, which is embodiedstate monopoly that would increase the autonomy and in the 1985 Telecommunications Business Law. Thecommercial orientation of the enterprise, attract chapter reviews the status of competition in both theprivate participation, and introduce competitive disci- facilities (Type I) and services (Type II) fields as well aspline. These alternatives are expected to help raise in- in the national and international arenas. As an examplevestment levels, mobilize new sources of capital, attract of current intemational policy considerations, Chapterentrepreneurial talent, improve enterprise efficiiency, 7 discusses the terms and conditions for value-addedand increase responsiveness to user demands. Such un- services competition currently being negotiated be-dertakings, however, raise broad policy and regulatory tween Japan and the United States. The impact of theseissues that many developing country governments may structural changes on the former domestic (Nipponnot yet be well equipped to address. Telegraph and Telephone) and international (Kokusai

Denshin Denwa) state-owned monopoly carriers are de-Overview scribed in both Chapters 7 and 8. Chapter 9 describes

the first step in liberalizing the telecommunicationssector in New Zealand, the splitting up of the New

This volume addresses these issues and presents the Zealand Post Office and the restructuring of its tele-experiences of various countries that have restruc- communications operation as a corporation. The gov-tured their telecommunications sector to adjust to the ermment of New Zealand has clearly stated that thechanging environment. overall economic objective toward which it is working

The book is organized in four parts. Part I establishes involves liberalization and competition, clarification ofthe conceptual framework. It examines and discusses social and economic policies, and the separation ofthe forces for change in the telecommunications sec- commercial and noncommercial activities. The forcestor in the industrialized and the developing worlds, of change noted in earlier chapters are also present inthe constraints on operating entities, national policy Australia; however, because of Australia's particular de-issues, sector structure issues, and the various stra- mographic, geographic, and economic characteristics,tegic options available to the countries (Chapter 2)'. Al- Chapter 10 suggests that the best policy option for thisthough the options most frequently perceived are vast and sparsely populated country is to strike a bal-competition in networks and customer premises equip- ance "between the long-standing emphasis on telecom-ment, Chapter 3 analyzes another option that is cur- munications as a universal service and the more recentrently the center of major debate, namely, service com- opportunities and imperatives for service differentia-petition. Using as an example the typical regulatory tion." The chapter also reviews briefly the organiza-structure of the United States at the state level, Chapter tional changes taking place within Telecom Australia4 describes the elements of regulation and proposes a (the domestic carrier) in anticipation of sectoralregujlatory structure for the orderly development of an changes. Chapter 11 sketches the transition in theincreasingly complex and competitive sector. United States from monopoly provision of telecom-

Part 11 describes the experience of industrialized munications services to competition and deregulation.countries with telecommunications sector reform. It examines markets, such as those for customer prem-Some of the structural and regulatory options that are ises equipment and certain network equipment, wherebeing impiemented or explored in Europe, North Armer- in the author's opinion competition has been success-.Ica, and the Pacific Rim are reviewed in Chapter 5, fully implemented. Competition in short-haul toll ser-which also examines the external factors that are affect- vice is perceived to be far from perfect, and commentsing national policy in these OECD countries and suggests are offered on further liberalization in the Unitedvarious policy options for consideration by policymak- States.ers rather than as models to be emulated. Actual experi- Part III presents the experiences of developingences in the United Kingdom, Japan, New Zealand, Aus- countries. Chapter 12 provides the necessary back-tralia, and the United States are described in Chapters ground by reviewing the basic features that char-6 to 11. Chapter 6 discusses the forces and events that acterize the telecommunications sector in develop-preceded the introduction of competition in the United ing countries: service provision by a public sectorKingdom and the privatization of British Telecom in monopoly; underinvestment; inadequate sector poli-1984; it candidly assesses the impact on and current cies; and weak organization, management, and person-impressions of each major stakeholder (that is, the cus- nel policies. Chapter 12 then reviews three general di-tomers, the shareholders, the employees, the govem- rections of change in developing countries. These arement, the regulator, and the media). Chapter 7 de- also described in other terms in Part I and involve thescribes the facilities-services type of regulatory shifting of operations away from government, the re-

Stctural am i Tmna 3

duction of monopoly scope (including the introduction attention to the conditions, objectives, constraints,of competition), and the separation and strengthening structural characteristics, and directions taken. Theof the policy and regulatory functions. Changes cur- chapter assesses a number of factors that, according torently under way in some thirty developing countries the author, have contributed to increasing productivityare briefly described. Chapter 13 discusses the way in and efficiency and have thereby helped meet some ofwhich the forces of change have persuaded the govem- the govemment's aims in restructuring. In contrast toment of Sri tanka to restructure. Of particular interest India's government, the government of Malaysia re-is a brief outline of the procedures followed, from the structured the entire telecommunications sector andgovernment's establishment of a Presidential Commit- established a telecommunications company at the be-tee of Inquiry, to the passing of necessary legislation ginning of 1987 as a first step toward partial and per-to set up the operator and regulatory body, and finally haps full privatization (Chapter 16). Thus the processto the institution of a self-liquidating board (responsi- being followed in Malaysia is in a sense similar to thatble to the head of state) to implement privatization and in Sri Lanka. a phased restructuring that allows timeencourage foreign collaboration. Chapters 14 and 15 and opportunity for adaptation at each step.exnine the situation in India. Chapter 14 also reviews Part IV (Chapter 17) concludes by summarizing thethe possibilities of raising capital privately and suggests alternatives for the future that are open to thea number of areas in which competition could be intro- developing world. It distills the essence of the seminarduced. Chapter 15 describes the 1986 reorganization of material while at the same time capturing the maina part of the Indian domestic telecommunications net- points of the lively exchanges that took place follogwork Into a wholly government-owned public limited individual presentations, in small discussion groups,Bombay and Delhi telecommunications company, with and during the concluding session.

Part I

The Changing World ofTelecommunications

2

Emerging Issues in World TelecommunicationsTimothy E. Nulty

The world environment of telecommunications has dominant telecommunications enterprises in the wakechanged dramatically in recent years and is continuing of sector reform. The concluding remarks highlight theto do so at an accelerating rate. Merging communica- growing importance of sector policy and regulation.tions and computer technologies have sparked innova-tions that are transforming global and local activities Pressures on the Telecommunications Sectorof all sorts. No economic, political, or social entity isexempt from the influence of the telecommunicationsrevolution. Telecommunications has traditionally been viewed as

The pressure on traditional telecommunications sys- the quintessential public utility. Economies of scale,tems stemmed from changes in technology and first be- combined with political (including military) sensitivity,came acute in the United States about fifteen years ago. created high entry barriers and large externalities. Tele-Since that time, the U.S. telecommunications indus- communications was believed to be a natural monop-try and related government policy have drastically oly, an essential public good that government shouldchanged. It remains to be seen to what extent the provide in a noncommercial mode. Within this envi-changes that have occurred have been desirable. It is ronment, development focused primarily on the exten-certain, however, that the pressures on the old system sion of standard service, the building of basic networks,were irresistible and that change of some sort was in- and improvements in the performance of the operatingevitable. entities.

Although the pressures in question were first felt inthe United States, they are not particularly American The Telecommnunications Revolutionin either nature or origin. During the last five to sevenyears, they manifested themselves throughout the in- During the last thirty years, the pace of technologicaldustrialized world and caused profound changes in the change in telecommunications has gradually increased;policy and structure of the telecommunications sector. breakthroughs during and immediately after WorldIt was inevitable that the seismic ripples of the telecom- War 11 (for example, microwave transmission andmunications earthquake would reach the developing transistors) were quickly followed by the emergence ofcountries, where they are further complicated by the new fields of industrial development (for example, inte-special problems of developing economies. grated microcircuits, satellites, and optical transmis-

This chapter reviews the forces underlying the world- sion). In the last ten years the process has reached awide process of change and the effects on the entities tuming point and has become a true technological andthat provide telecommunications services. It also dis- economic revolution. Several features have charac-cusses the implications for developing countries, raises terized this revolution.issues pertaining to sector development and to optionsat the levels of national policy and sector and company Lowered barriers to entry. In 1970, for instance,structure, and examines the nature and role of the a private automatic branch exchange (PABx) was a

7

8 Timothy E. Nutty

roomful of electromechanical switches manufactured in the Republic of Korea, are stored in Mead Data Cen-by one of approximately a dozen firms. There are cur- tral's computers in the United States, and are accessedrently more than four times as many manufacturers be- by lawyers all over the world-an essential service forcause startup costs for new companies dropped from firms wishing to do business in the U.S. market. Simi-millions of dollars to hundred of thousands of dollars lar data networks exist for medicine (supplying infor-with the increased availability of standardized inte- mation on the latest drugs, diagnostic data, and sograted circuits and system software. The costs of basic forth) and agriculture (new seeds, pesticides, and mar-network components, including electronic switches, ket information). Engineers in Pakistan produce draw-cables (now increasingly optical), microwave links, ex- ings for architects working in Stockholm on a projectchange termination assemblies, multiplexers, and so in Saudi Arabia. Computer programmers in India writeforth, have plummeted per bit transmitted. Costs have software for Texas Instruments in Dallas. Keypunch op-similarly dropped for altemative facilities such as cellu- erators in Barbados service data processing operationslar radio, small satellite terminals, and phone patches anywhere in the world. Even traditional telephone ser-for simplex radio-technologies that have made it vice has been transformed. Modem switching and sig-cheaper and easier for customers and competitors to naling techniques have generated new voice services,communicate by means other than the traditional pub- such as those used for airline booking, in which a calllic switched telephone network. to, say, Pan American World Airways from any local

telephone (for example, in Boston) is automaticallyChanged cost structures for all other industries. routed to any open booking agent at any point in the

The relative cost of processing and transmitting infor- airline's network (for example, in Miami) from whichmation, as distinct from any other factor of production, bookings-for hotels and rental cars as well as forhas declined steeply. In 1983, for instance, it cost flights-can be made worldwide.US$12,000-14,000 per month to lease the U.S. half of As more and more transactions have been shifted toa private transatlantic voice channel. Today the cost is electronic media, the superior intrinsic abilities and$4,000-5,000. The new TAT-8 submarine cable will carry lower cost of these systems have, in turn, made theira similar price. The precipitous decline in the cost of use more widespread. The effect has been explosive.information transmission and processing has stimu- Transactions on the Society for Worldwide Interbanklated its use in more and more areas. In merchandising, Financial Telecommunications (swirr) network, for ex-new systems integrate retail transactions at the cash ample, have grown from 20,000 per day in 1977 toregister with purchasing and inventory management. 700,000 per day in 1985. The Reuter Monitor and Deal-In manufacturing, there are systems for integrating ing system had 50,300 terminals in use in Decemberdispersed worldwide sourcing and production with in- 1984 and 71,450 by December 1985.ventory and orders or for centralizing computer aided The most explosive growth is attributed to communi-design. Systems now used in oil drilling permit the cation with and among computers. Although conven-analysis from a central location of a rig's seismic data tional telephone conversations still account for theand facilitate management of the rig's activity. Still bulk of world telecommunications traffic, by one esti-other systems coordinate and improve the dispatch of mate data traffic is increasing by 20-30 percent peraircraft, ships, trucks, and trains used in transport with year. The distinction between voice and data, however,information regarding fuel and loads. Global publishing is misleading for two reasons. First, technically, it is in-networks permit a book or newspaper article written in creasingly meaningless; there is no difference betweenone country to be mocked up in a second, typeset by voice and data in a digital system (like telex and facsim-computer in a third, and then transmitted by satellite ile, voice is merely one of the many types of streamsfor printing anywhere in the world. All of these systems of ones and zeros that do not require very great speed).have drastically altered the cost structures in their re- Electronic mail between personal computers is not onlyspective spheres. data traffic but also a direct substitute for voice com-

munication. Second, the artificial distinction betweenNew services and new ways of delivering tradi- voice and data fails to take into account the real impact

tional services. As information and communication of the telecommunications revolution, namely thetechniques are extended, they have been continuously transformation of world markets into integrated globaladapted to the specific needs of widely differing activi- information systems based on electronic interchange.ties. The result has been a proliferation of new services. The interchange includes many speeds and varieties ofU.S. judicial opinions, for example, are abstracted and communications, including voice. Participation in in-entered into an electronic data base by clerical workers ternational finance at the present time, for instance-

Emergmg Issues m World Telecommunications 9

as a major borrower, as an investor, or as a banker- town Buenos Aires. Indeed, any PABX can be (and in-requires access to telecommunications and information creasingly i4) used to form the basis for a private tele-systems that connect the financial centers around the phone system capable of internal communicationsworld twenty-four hours a day, whether for voice com- (often over privately erected outside lines of doubtfulmunication or for data exchange. The same goes for the legality) and capable also of providing limited access totourist and travel industries, commodities exchange, the public switched network. Similarly, in rural areas,fashion design, and many other activities. phone patches available for purchase permit any exist-

ing telephone line to be converted (legally or illegally)Effects on Telecommunications Entities into a base station for simplex citizen band radio con-

nections to the national public telephone network. InIn short, the global economic system is increasingly in- a number of countries, medium and large users in non-tegrated and electronic: without adequate access to the metropolitan areas (singly or in groups) are consider-systems by which the world's business is done, no com- ing or even building local switched (mobile or fixed)pany can do business in the world. First, access to reli- radio-telephone systems connected either to satelliteable telecommunications has become an economic ne- facilities for international service or to specially pro-cessity for the most powerful interests in every country. vided private lines and trunks for connection to the na-Second, the technological revolution has multiplied the tional network. Again, some of this activity is overtavailable forms of telecommunications access and has (blessed or tolerated by the telecommunications en-drastically altered their costs. These two developments tity), and some of it is covert (condoned or winked atare generating enormous pressures, from both the de- by the government).mand and the supply sides of the industry, on existingtelecommunications organizations in all countries. Constraints on Operating Entities

On the demand side, as more and more companiesand individuals perceive that access to adequate tele- Customers need more and better telecommunicationscommunications services is essential to their liveli- services and have more altematives for acquiring themhood, they try to make telecommunications entities if the telecommunications entity fails to provide. Theprovide the needed services. If the entities are unable power of the customers and the variety and flexibilityto respond adequately, and at prices the customers con- of the technical alternatives ensure that customer de-sider reasonable, customers are driven to seek other mands will persist and will be met one way or another.remedies. Not infrequently these unsatisfied customers At the same time, telecommunications entities areinclude some branches of government-the military, prevented by a number of powerful factors from re-railroads, power utilities, major state enterprises, and sponding rapidly and effectively to changing demandso on. and to the availability of altemative supply. The con-

On the supply side, sources of telecommunications straints often include: (a) limits on the entities' abilityservices that represent alternatives to the offerings of the to invest (due to government constraints on new budgettelecommunications entities are increasingly available. resources and on the amount of operating surplusesAggressive suppliers of equipment, systems, and ser- that may be reinvested and due to limitations on thevices are proliferating and are actively seeking new cus- telecommunications entity's ability to raise capital else-tomers, especially, but not solely, among large, inter- where); (b) obligations to serve high-cost customers;nationally active firms. Once domestic entities-firms (c) political and legal restrictions on the extent toor govemment departments-have decided to install which prices or services may be changed; (d) institu-some form of dedicated system, this system usually has tional structures derived from the civil service that areexcess capacity (or can be designed for more capacity ill suited to cost-conscious, customer-oriented com-at little additional cost) that can be made available to mercial activity; and (e) constraints on sources ofother users. Examples, licit and otherwise, abound. equipment. Difficulties in responding to market chal-Major cases, such as the high-capacity optical backbone lenges further encourage disappointed customers to seeknetwork being built by the Indian railways and facilities altemative sources-and encourage altemative suppli-being operated in many countries by oil companies, ers to provide them.banks, power utilities, and pipeline companies are well Before telecommunications entities can improveknown. In addition, however, there is an increasing in- their performance and retain customers, they must becidence of smaller, informal alternative systems. Virtu- relieved of these burdens. Telecommunications entitiesally any visitor to Argentina will have noted the myriad must have more freedom to invest in needed facilities,illegal extension lines festooning the buildings of down- to reduce costs, to improve quality, and to set prices

10 Timothy E. Nulty

economically. They must also be subject to greater dis- cope with modem disintegrative pressures as they trycipline to ensure that the greater freedom is actually to construct basic national networks.used for the intended ends and not merely to protectmonopoly positions or to perpetuate inefficient modes Conflicting Forcesof operation. In other words, telecommunications enti-ties must be permitted-and required-to behave Telecommunications entities in developing nationsmore like commercial businesses under conditions thus find themselves in a serious bind. On the oneof competitive market discipline. hand, technical degradation of the network from

overload and inadequate maintenance, potential dis-economies of proliferating and fragmented systems,and loss of revenue to cross-subsidize extension of thebasic network are particularly acute problems. Loss of

The pressures on the governments and telecommunica- revenues from large customers looms even larger as ations entities of developing countries are similar to problem than it does in industrialized countries be-those being felt throughout the industrialized world cause the proportion of total traffic concentrated inand even the socialist bloc countries. As previously such customers is greater. On the other hand, it is verynoted, these forces have already changed the global difficult for telecommunications entities in developinglandscape dramatically: they have brought deregulation countries, in their current form and condition, to pro-and divestiture in the United States, privatization in the vide the services large customers need and demand. IfUnited Kingdom and Japan, competition in interna- telecommunications entities and govemments respondtional services and facilities, and liberalization and to the dilemma by forbidding alternative systems with-competitive challenges in Europe. out being able to provide the services themselves, the

customers-and ultimately the country-will suffer.Additional Difficulties Furthermore, large users (private and govemmental),

which are politically and financially powerful actors inNewly industrialized countries and developing coun- their own right, are fully capable of challenging and de-tries face complications in addition to those that con- feating the telecommunications entities if they believefront industrialized countries: (a) industrialized coun- their vital interests to be at stake.tries built their basic national networks during the era Newly industrialized and developing countries,of relatively unchallenged monopoly control, a period however, have some opportunities not enjoyed by thewithout a counterpart in developing countries; (b) bud- industrialized countries. Specifically, new tech-get problems in developing countries create little op- nologies provide an opportunity to leapfrog overportunity for increasing investment from traditional some of the most expensive and difficult phases of tele-sources, but at the same time capital markets are thin, communications development. Advanced radio and sat-so that the option of borrowing to supplement internal ellite technologies, for instance, can temporarily orcash generation to increase growth is limited; and (c) permanently forestall the need to hard-wire remoteintense needs for scarce investment resources, espe- rural areas. Then, too, developing countries can go di-cially those requiring foreign exchange, reduce toler- rectly to superior electronic digital systems without theance for excess capacity. expense of phasing out established electromechanical

The capital plant of the public networks of North systems.America, Europe, and Japan is worth roughly a triillion The pressure on telecommunications entities comesU.S. dollars. The enormous task of building national precisely as govemments find themselves increasinglynetworks was relatively easy in the industrialized coun- strapped for funds. In addition, it affects operating enti-tries because the traditional telecommunications mo- ties that, although often profitable, are neverthelessnopoly could dictate uniform standards, could charge usually inefficient, poorly managed, and ill equipped towhat the market would bear in profitable areas, and respond quickly or imaginatively to new demands andcould use the revenue to subsidize expansion in other contingencies. The inability of govemments and tele-areas that were not immediately profitable. communications entities to react with adequate speed

The new pressures to be competitive-especially in is causing real political difficulty. Dissatisfaction withthe business market, which had previously been highly telecommunications is becoming front page news inlucrative-reached developed countries only after uni- developing countries. Governments are beginning toversal national networks had been built. The need for feel that failure to deal with this discontent seriouslymonopoly integration was therefore reduced. Newly in- threatens not only development in general but also atdustrialized and developing countries, however, rnust times even their own political survival.

Emerging Issues in World Telecommunwcations 11

Move toward Sector Refomis evidence that telecommunications shortages in othersectors have adverse effects. Furthermore, the propor-

The govemments of developing and newly industrial- tion of a country's investment actually devoted toized countries are thus being forced to reevaluate tele- telecommunications is increasingly a market-drivencommunications to seek ways of loosening the con- amount, independent of nominal govemment policy. Ifstraints that keep the sector from improving its the telecommunications entity does not invest enoughperformance. Meanwhile, major users are pressing to meet a sufficient proportion of customers' demands,ahead with building their own networks, whether or many customers will procure services or facilities else-not the existing telecommunications entities partici- where by one means or another. It is increasingly diffi-pate, and all countries are grapplingwith ways of coordi- cult to stop this trend: many of the affected customersnating the proliferation. Asia and Latin American gov- are other govemment departments, large firms, andemments will feel the pressure most acutely; their parastatals with sufficient influence to prevail.telecommunications markets are expected to grow at In such a situation, telecommunications investment10-11 percent for the next five years, compared with must grow so that it satisfies customer demand enoughthe world average of 8.3 percent per year. to discourage excessive or uneconomic alternatives. It

In the effort to respond to these pressures better and is not realistic, efficient, or desirable, however, for theto reduce the constraints on the telecommunications established telecommunications entities to meet allproviders, many newly industrialized and developing customer demands. Customers should therefore enjoycountries, like their industrial counterparts, are con- some freedom to seek alternatives for the remainder ofsidering reorganizing the telecommunications sector their needs, especially in newly industrialized and de-and the provision of telecommunications services. The veloping countries, where constraints on the entity'sreforms have many purposes: to hasten the rate of ability to mobilize additional financing are severe. Newgrowth in both new and traditional telecommunica- providers in selected market segments can by theirtions services, to improve responsiveness to customer presence increase the total resources available for tele-and economic pressures, to increase efficiency and cost communications investment and in particular can re-discipline in the telecommunications provider(s), to duce the effect of public sector budgetary restrictionsopen fresh avenues for innovation, and to attract new on telecommunications growth. This benefit, however,investment and business into a booming industry. must be balanced against the dangers of excessive re-

dundancy and poor interworking. Proper balancing can

Issues of National Policy best be accomplished by an explicit policy andenforcement mechanism covering interconnectionstandards, obligations, and prices (this subject is dis-

Efforts to reform telecommunications in developing cussed more extensively in Chapter 4).and newly industrialized countries to deal with thechanging world environment raise new issues and Foreign Exchangechange old ones. Such issues arise at every level. I willdiscuss issues both of national policy and of sector and Although telecommunications is often a profitableentity structure. undertaking-even when the service is poor and the

entity is badly run-it does not generally eam foreignUndenwetment exchange directly. Some exceptions, resulting from ei-

ther asymmetrical international traffic (for example, inTelecommunications has traditionally been given low El Salvador) or special revenue-sharing agreements (forpriority in the plans of developing countries. Today's example, between Mexico and the United States), reflectenvironment requires that the telecommunications major differences in costs. In most developing coun-investment be increased, as many governments tries, however, telecommunications investment isunderstand-but by how much? And at the expense of highly foreign exchange intensive. The result is a di-which other sectors? How can the increased investment lemma in places where, as in most developing coun-be accomplished in the face of near universal fiscal tries, foreign exchange is scarce.stringency? Foreign exchange shortages do not, however, pre-

A very strong case can be made for expanded vent meaningful gains. In fact, significant improvementtelecommunications investment in most developing in service is possible without large purchases of im-countries in terms of high economic returns, large ported equipment through better management, main-gaps between supply and demand, demonstrated user tenance, traffic engineering, billing, and so forth. Thiswillingness to pay fees in excess of official tariffs, and point is even truer wherever a significant domestic

12 TYmothy E. Nulty

manufacturing sector supplies telecommunications nificant benefits associated with the quality of life (forequipment to support such improvements. In these instance, access to friends and kin) arise from ruralcountries, better performance of the telecommiunica- telecommunications. Not surprisingly, there is a largetions manufacturing industry (for example, by empha- overt demand for rural services in most developingsizing management, quality control, and delivery per- countries, even at prices that reflect the full costformance) is crucially important and need not involve of delivery-to say nothing of the hidden demandproportionate amounts of foreign exchange. (I do not that emerges only once services have become readilymean to suggest that the necessary reforms will be available.easy.) The relative backwardness of telecommunications in

Furthermore, improved telecommunications ser- rural areas partly stems from the fact that unit costsvices increase foreign exchange eamings and savings. of expansion, operation, and maintenance are high rel-Tourism and many export industries require high- ative to those in densely populated cities. Rural ser-quality access to world market information andl com- vices are thus less profitable (at prices constrained bymunications. Several studies show that telecommuni- nationwide average costing practices) than urban ser-cations services and foreign exchange eamings are vices. Coverage of numerous small and scattered placeshighly correlated. Likewise, telecommunications per- also places a heavy burden on manpower and organi-mits more efficient use of imported vehicles and fuel, zation. Faced with limited resources (financial and in-effective distribution of food and supplies, and other stitutional) and with large unmet urban demands, theimprovements that reduce foreign exchange ccsts to telecommunications entities have understandably notthe economy overall. Still, telecommunications enti- pushed aggressively to expand in rural areas. Increas-ties are rarely permitted to develop pricing imech- ing emphasis on business-oriented management inanisms that capture some of these foreign exchange telecommunications entities (generally desirable) willgains. tend to intensify the resistance to rural expansion.

The objectives of the telecommunications enterpriseDistributional Equity and broader national priorities regarding rural devel-

opment, access to basic services, and income redistri-Access to telecommunications services is, and will al- bution are thus often in conflict. Resolving this conflictways be, a politically sensitive issue because it confers involves both making the rural telecommunications in-differential commercial and political advantages on vestments more cost-effective and adjusting sector pol-those who have it. A purely market-driven systiem of icy and organization.allocation will tend to produce a system that concen-trates disproportionately in the main cities and on the Reconcling Equity and Commercial Objectiveslargest and wealthiest customers. This concentrationcauses political problems and can impede the realiza- The goals of distributional equity and commercial effi-tion of important development goals, such as the de- ciency can never be fully reconciled, and politicalcentralization of economic activity and the develop- judgments must ultimately be made. Still, there arement of rural areas. But the commercial pressures that several ways of minimizing the conflict between the twoare reflected by concentration on high-density, high- and of simplifying the political choices.income customers, sectors, and regions cannot, andshould not, be ignored. Rural services. Rural services should be carefully tai-

Telecommunications services in developing coun- lored to rural circumstances. Traffic characteristics andtries, besides being insufficient to meet demand in gen- environment in rural areas differ from those in urbaneral, are concentrated in major urban areas. This im- areas. Rural installations, for example, comprise rela-balance reflects neither a lack of communication needs tively few stations covering large and often remote ar-in rural areas nor an inability to pay. Studies have eas, so that average distances are long and traffic pershown that rural telecommunications services are used route low. Some individual stations, however, may bemainly in connection with economic production and used very intensively and may have average traffic perdistribution and that they exhibit high rates of eco- line well in excess of that in cities. Also, rural areasnomic return. There is anecdotal evidence that a high communicate mostly with towns and cities rather thancost is imposed on other productive sectors (for exam- with other rural communities. Extreme environmentalple, transportation) and on delivery of social services conditions are common, power supply is often unrelia-(for example, health, education, and security) by the ble (or nonexistent at intermediate points betweenlack of rural telecommunications. Furthermore, sig- communities), and all-year access is not assured. All of

Emerging Issues mz World Telecommunications 13

these conditions indicate that rural areas need different Subsidy. Service to rural or remote regions can betypes of services, different network configurations, and subsidized. In general, commercial considerationsdifferent technologies. The choice is further compli- should determine the telecommunications entity's owncated by uncertainties regarding the availability and resource allocation, but there should be compensatingprice of some solutions (such as spare satellite capaci- mechanisms for subsidizing the extension of service toties), by interdependence with policy decisions in other regions and groups that represent a loss from the op-sectors (for example, domestic manufacturing of small erator's standpoint but that it is in the national interestearth stations), and by the proliferation of new options to serve. All countries have such subsidies, whether ex-for rural use in developing countries. plicit or implicit. The question is not whether to subsi-

dize but how to subsidize in order to derive the maxi-Diversifying supply. An important reason for the per- mum benefit for the lowest cost.

ceived unprofitability of rural services is that most na- As much as possible, subsidies should: (a) remaintional telecommunications entities must operate with separate from the pure commercial cost-related pricingmore or less uniform nationwide pricing. Theoretically, mechanisms of the telecommunications entity; (b) beif the entities were able to differentiate prices by re- explicit; (c) be regularly reevaluated to prevent vestedgions, even high-cost remote telecommunications ser- interest in their continuation from becoming toovices could be profitable. This is seldom a viable option, strong; and (d) have a built-in bias to decline auto-however, from the political and administrative stand- matically.points. Furthermore, most developing countries face If a service is valuable to its customers, this valueinstitutional difficulties in maintaining an effective should be reflected in an increasing willingness to paymanagement presence in rural areas. In view of these over time and hence in increasing capacity to generatepractical problems, it may often be desirable to permit revenue. The degree of subsidy should thus decline overother entities to provide some or all telecommunica- time (without necessarily disappearing). If a service istions services in areas where the existing entity is reluc- unable to survive any reduction in subsidy over time,tant or unable to meet demand. Other entities could then in principle it is probably not worth its cost evensubstitute for complete local networks or for any of the when extemalities and national interest are taken intofollowing: trunk connection to the rest of the network, account. Once a subsidy is in place, however, it canlocal lines and switching, terminal equipment, and prove politically difficult to remove. Thus, all subsidyextra services such as weather or market data. Also, mechanisms should have a built-in automatic tendencythere are often economies of scope (lower costs or ad- to decline. Affirmative action is then needed to main-ditional benefits from combining various services); for tain the subsidy rather than to remove it.example, a single facility might include a public tele- Sometimes the need to subsidize arises not from thephone, a postal agency, a simple audio conferencing inherent structure of cost and demand but from an in-room, and a small data and information service. The ex- stitutional limitatio i on the ability to change prices.perience in the United States, Finland, and some devel- National telecommtnications entities, for example, areoping countries suggests that small local companies or usually constrained by nationwide averaging principlescooperatives can provide some services and facilities so that they cannot charge higher prices in high-costsatisfactorily, thereby facilitating the development of areas even if customers would be willing to pay them.rural services without burdening the principal telecom-munications entity. In addition, such enterprises can Implementing subsidies. The many mechanisms thatoften mobilize local management skills, tap new may be used to implement subsidies include the inter-sources of capital (for example, farmers and local busi- nal and extemal (to the operating entity), the monetarynesses), lower overhead, and perhaps reduce cash out- and in kind, and the public and private. Only vague in-lays for investment through self-construction by users forrnation, if any, typically exists on the flow of subsi-(for example, pole erection, trench digging, and small dies. (Indeed, the very concept of a subsidy is not with-building construction). Disaggregated provision of out problems in an industry where so much of the costrural services, however, requires changes in the structure is overhead and where two-way networkingregulatory framework, especially with regard to sector complicates externalities among customers.) Henceorganization and ownership, pricing to final users, in- there is no clear idea of who really pays, who really ben-terconnection to the main networks, and technical efits, whether the benefits are worth whatever costs arestandards. It also requires setting up financing rrecha- involved, and so forth. As the pressure rises to improvenisms and specialized technical and management services with limited resources, the situation becomessupport. increasingly intolerable.

14 TImothy E. Nulty

The first requirement is for better information on the them elsewhere (thereby reducing the surpluses neededflow of subsidies. The second is for mechanisms to per- by the telecommunications entity to finance nationalmit subsidies to be reviewed in the light of national network extension) or will not get them at all (sufferingpolicy-to ascertain whether they are going to the re- damage when these services are needed, often to makegions and people they are intended to reach and the customer competitive intemationally). Freedom forwhether they are accomplishing the things desired. customers to procure their own facilities or services isThese mechanisms must include the telecommunica- desirable in order to put pressures associated with cost,tions entity but must not be dominated by it. Third, the quality, and innovation on the telecommunications en-method for actually collecting and distributing subsi- tities. If customers and competitors are allowed com-dies must abet the first two and must be as simple and plete freedom, however, too much of a developingcorruption-free as possible. country's scarce resources may be spent on building re-

dundant or incompatible systems.Policy options. Within these guidelines, a number of

specific options can be examined. Pricing principles Basic Issuesand tariff-setting practices basea on full cost recovery,for exampte, could be allowed to prevail where govern- Governments have little choice but to seek a balancedment believes that a market approach is adequate. Else- regime consisting of some combination of monopolywhere, startup or recurrent subsidies may be consid- and other providers of facilities and services. The ques-ered in view of the investments' economic and other tion is not whether to have such a mixed system butmerits and the government's development objectives. how to structure it so that it is orderly and efficient.Cross-subsidy could take place within the telecommu- The best solution depends on each country's circum-nications entities by means of interconnection tariffs stances and goals. The United States emphasizes thebetween telecommunications enterprises, by tax or distinction between basic and enhanced services, Japancredit incentives for rural telecommunications invest- separates providers of facilities and services, and Francements, or by government budgetary allocations. debates open and closed networks. All approaches, how-

ever, must address essentially the same issues.

Issues of Sector Structure * Which services or facilities should remain, on eco-nomic or political grounds, the exclusive preserveof the telecommunications entity? Which should

What entities should be in the sector? WYhat services be open to other providers rather than or in addi-should each one provide as a monopoly or in competi- tion to the existing entity?tion with other providers? What other providers exist t t rue shoul entite wnow and what providers should be permitted in the fu- g .ture? What are the rules for entry, exit, interconnec- competitive sphere and between the monopoly and

.io,, and pricing? These questions are preoccupying allcompetitive spheres (for example, rules regardinggovemments. conditions for entry, interconnection standards

and prices, and allowable competitive practices) soSector Conposition as to create a level playing field and promote effi-

ciency?

It has already been argued that a degree of diversity in * What institutional arrangements should: (a) moni-the supply of telecommunications services is needed in tor and enforce the rules? (b) resolve disputes be-order to mobilize additional investment resources, rec- tween and among parties? and (c) review andoncile equity and commercial objectives, and increase amend the points above as necessary, depend-the sector's implementation capacity. Furthermore, in ing on circumstances?the changing sector environment, no single telecom- These issues must be addressed collectively, or in-munications entity can provide efficiently and at reason- consistency will make seemingly rational solutions un-able cost all the services that all its customers might tenable. A policy decision to permit competition in thewant. Networks are designed to optimize on particular subscriber terminal equipment market, for instance,traffic characteristics-they cannot do everything, and without rules goveming whether or how the operatingcertainly cannot do everything efficiently. Too much at- entity can do business in this market, and without atention given to special (mostly large) customers will mechanism for enforcing these rules, may cause the en-detract from the basic service. But if too little attention tity to package terminal equipment with services andis given to special services, large users will either obtain may thereby kill competition. The same goes for value-

Emergng issues in World relwmmwicahions 15

added services, which can be provided either as add-ons needs (for example, Sweden and Norway each with aby new firms or as part of a packaged basic service by single telecommunications entity, Denmark withthe existing entity. seven, and Finland with about sixty). Where several en-

terprises are involved, however, the critical issue isMajor Options usually revenue sharing. International long-distance

services, and to a lesser extent domestic ones, tend toFor most developing countries there are five main ways be more profitable than local service in developingof reducing or restructuring the involvement of the ex- countries, largely because they receive most of the rev-isting telecommunications entity: (a) diversifying and enue from lucrative intemational traffic but incur rela-separating the supply of subscriber equipment; (b) es- tively little of the costs, most of which are embeddedtablishing separate business networks; (c) allowing ded- in the local network. The result is high-quality interna-icated networks to offer services to others; (d) diversify- tional service once calls reach the international gate-ing the provision of value-added services; and (e) way exchange but poor, resource-starved urban andsubcontracting works and services. In most developing rural networks. A combination of interconnectioncountries, 20-30 percent (by value) of the telecommu- charges and taxes should be levied, or the agreementnications entity's current activities could be under- on sharing of intemational revenues should be revised,taken by other entities without undernining the eco- to ensure that the international services make a reason-nomic viability of the first provider. (Chapter 12 able contribution to the support of the development ofexaunines this subject in greater depth.) the national telecommunications network. Such devel-

In addition, national monopolies can be divided into opment ultimately benefits everyone, including the in-separate regional operations. For decades, both devel- temational callers.oping and advanced countries showed a trend towardconsolidation of local and regional telecommunications Sector Pricingentities into national companies. The process may havegone too far, producing overcentralized entities. Tbe Inseparable from the issue of sector structure is sectorbreakup of American Telephone and Telegraph (AT&T) pricing. in fact, pricing structure can ultimately deter-was the first major move in the opposite direction. mine sector structure. The traditional question for tele-More recently, in India the Bombay and Delhi networks communications tariffs was relatively simple, namelywere split off into a separate corporation. Although how to generate sufficient revenues to cover costs andconsolidation of very small entities should generally make available a reasonable proportion of funds neededcontinue in developing countries, especially as few of for expansion. Additional tariff objectives have more re-the small operators can afford to modernize and expand cently been coming into focus: the efficient allocationrapidly, the initial success of India's Bombay/Delhi of the supply of services and the mobilization of surpluscorporation suggests that at least regional decentrali- funds for use by govemment in other sectors.zation should be given more attention in the larger de- Pricing is complicated because of the emerging po-veloping countries. tential for competitive supply, an issue that distin-

Another way of splitting supply among several pro- guishes telecommunications from some other tradi-viders is on the basis of whether services are local, na- tional public utility sectors (such as power and watertional, or intemational in coverage. In developing coun- supply) in which alternative supply is at present not antries local, domestic long-distance, and international issue. In this respect telecommunications resemblesservices may all be provided by the same enterprises (as transportation. Like transportation, telecommunica-they are in Pakistan), or international services may be tions as a sector was originally dominated by one modeseparate (as they are in India), or local services may be (railroads for transportation, telephones for telecom-separate (as they are in Colombia). Each approach has munications); the owner of the "roads" and the ownerits pluses and minuses. Smaller firms are easier to man- of the 'vehicles" was the same, and the economics ofage and are more responsive to their users and commu- the sector were dictated by this integration. Like rail-nities, but loss of scale and coordination cause prob- roads, telecommunications entities face pricing prob-lems. Because customers are able to pay high prices, lems. The traditional public utility questions of how toand the service is extremely important to them, inter- recover huge fixed costs where marginal costs are lownational services are a major source of potential subsi- and facilities are not easily moved are compounded bydies to support extension of the domestic network. In the emergence of competition from entities with verygeneral, there is no reason for disturbing any well- different cost characteristics. (Pricing is dealt with infunctioning system that meets the particular country's more detail in Chapter 4.)

16 Timothy E. Nulty

The Nature and Role of the Dominant tive pressure on the dominant telecommunicationsTelecommunications Entity entity.

To meet the pressures for increased commercial effi-ciency and improved service, reforms are being consid-

Most countries, including most developing countries, ered in a number of developing countries. These re-are under mounting pressure to improve and extend forms fall into two broad categories. First are variousservice rapidly; to provide new services to certain internal changes in the organization of the telecommu-classes of customers; and to reduce the drain on in- nications entities themselves, intended to improve thecreasingly tight government budgets (and, in many efficiency, flexibility, and energy with which they oper-places, make a positive net contribution to the govem- ate. The second category concerns the overall statusment budget). As noted above, this situation suggests and governance of the entity with regard to the govem-increasingly complex sector structures. Nonethelless, a ment and the rest of the economy. Reforms in this lat-single telecommunications entity is likely to remain ter category fall along a continuum. At one end aredominant as custodian of the national network and as measures that merely reorganize an existing entity, forsupplier of last resort. To achieve the desired goals it example, from a subdepartment in a larger govemmentwill therefore be necessary for the dominant entity to ministry into a separate department with its own bud-increase both the efficiency with which it uses re- get, organizational hierarchy, and so on. Next comesources and its flexibility with respect to resources and measures giving the entity operational autonomy as anways of doing things. It will also be necessary to put independent but wholly state-owned entity. Such enti-some distance between telecommunications operations ties typically operate under statutes created specificallyand the political process. (Both sides are interested in for them, which treat such matters as taxation, borrow-his greater separation; politicians do not want the ris- ing, staffing, and pay structures differently from theing dissatisfaction with telecommunications service to way in which private companies handle them. Still fur-be laid directly at their doorstep; telecommunications ther along the continuum are arrangements creating aentities do not want constant political interference in private telecommunications corporation operatingtheir operations.) under normal company law, whose stock is wholly or

principally owned by the state. Next are private compa-Corporate Governance nies that are minority owned by govemment. In these

cases, government may insist on some sort of "goldenGreater efficiency, greater flexibility, and greater dis- share" that guarantees veto power over company activi-tance from the political process all suggest a movement ties and decisions with significant consequences for na-toward greater autonomy, commercial orientation, pri- tional security or similar interests but does not givevate participation, and competitive discipline on costs, government control over day-to-day operations orservices, and prices. In general, shifting the telecom- purely business decisions. Finally, there is full-scalemunications entity farther from govemment provides privatization, in which a private firm with no govern-the opportunity for greater efficiency in the commercial ment participation is created (or is permitted) to takesense. This development is desirable in a technical and over the nation's telecommunications system. Each ofeconomic environment in which telecommunications these broad organizational types leaves considerableis becoming less like the traditional, natural monopoly room for variation.public utility and more like, say, the computer indus-try. There are dangers, however. First, the opportu- Relationship with the Telecommunicationsnity for greater efficiency may not be realized because Manufacturing Industrymore independent (including privatized) operators maytake advantage of continuing monopoly powers to Telecommunications equipment manufacturing is at-make profits by charging high prices without improv- tractive to many of the larger or more advanced devel-ing service or efficiency. Second, national goals oping countries because it is the one high-technology,of social, economic, and political integration may be electronics-based subsector for which there is a large,ignored or undermined. Neither of these dangers stable, and assured domestic market. It is thus seen asimplies that telecommunications should not be made both a good investment in itself and a good springboardmore independent and commercial. The implication into advanced technology in general. The predomi-is rather that steps should be taken to minimize the nance of a single, usually public sector buyer frees theside effects of commercialization and independence. manufacturer from the need to devote resources toThese steps include the institution of function- marketing and facilitates protection.ing regulatory schemes and some degree of competi- Policies to promote telecommunications manufac-

Emerging Issues in World Telecommunications 17

turing vary from direct public sector investment (as in fluence of market forces over operations and invest-India) to protection of private (even foreign) investors ment in the sector. This similarity does not reflect any(as in Argentina, Brazil, and Mexico). The scope of common ideology; governments of all political inclina-manufacturing also varies widely, from nearly the full tions are examining very similar reforms. Rather, therange of equipment, including large central-office resemblances have to do with the nature of the techni-switches (as in Argentina, Brazil, India, and Turkey) to cal, economic, and political forces bearing down on theonly cables (Thailand) or telephone instruments. In sector. The market orientation of the telecommunica-some countries (for example, Brazil), competition tions sector can be increased by allowing new entrantsamong domestic firms is encouraged, but direct compe- into the sector, by changing the way in which the exist-tition from imports is seldom allowed. In this respect, ing entities operate, or by doing both.the developing countries are largely following the ex- Despite the increasing pressure for more commercialample set by most major advanced countries at a simi- modes of behavior, however, telecommunications re-lar stage of development. mains an important public good with powerful social

In principle, domestic manufacturing can benefit the and political implications that cannot be ignored andtelecommuncations entity in terms of delivery coordi- cannot be entirely subjected to market forces. Any re-nation, after-sales support, tailor-made products, and form of the telecommunications sector that fails to takejoint research, development, and engineering. A fully these implications into account will soon disintegrate.protected manufacturing industry can become a major In the traditional telecommunications sector, mostconstraint on the telecommunications entity, however, policy issues were intemalized within the telecommu-if the domestic industry (a) produces outmoded prod- nications entity. The monopoly provider, often explic-ucts; (b) does not meet intemational quality standards; itly a part of the political process as a ministry of gov-(c) is a high-cost producer; or (d) is unable to meet de- emment, had the capacity both to make the necessarylivery schedules because of delays, strikes, and lack of tradeoffs, so that social and political considerationsimported components. were balanced with economic efficiency, and to make

The risk that the manufacturing industry will seri- its decisions stick through legal or market powers.ously constrain the telecommunications network re- These traditional mechanisms for balancing conflict-lates to industrial policy. Experience in India and else- ing interests are losing force. The pressures of the newwhere demonstrates that each of the risks listed above environment, moreover, are reducing the power (politi-can be significant when industrial policy is excessively cal, legal, and market) of the established telecommuni-autarkic, public sector oriented, and anticompetitive. cations entities and are forcing them to give greater

To keep industrial policy on a sound track, domestic weight to economic considerations and less to politicaltelecommunications equipment manufacturers should and social considerations. New entrants into the sectorbe subjected to competition, or at least the threat of do so perforce (whether they are customers providingcompetition, by being required to meet certain targets their own facilities or new carriers), and traditionalfor price, quality, technology, and delivery time based operating entities must respond in kind. As telecom-on intemational standards. Penalties for failure to com- munications becomes more important to commercialply should include opening the market to imports. success and as more and more players become involved,One compromise would be to provide sufficient protec- the conflict among interests becomes stronger andtion to encourage investment by guaranteeing that a more complex. To require the entities to solve politicalcertain portion of the factory's potential output would problems while at the same time requiring them to bebe purchased if it met certain standards of price and economically efficient, profitable, and innovative in thequality, while subjecting the remainder to import new environment is both unfair and impractical.competition. Whether or not import competition is al- New mechanisms must be created (or old ones re-lowed, domestic competition at least should be encour- formed) that can reconcile these conflicting interestsaged whenever economies of scale do not preclude realistically in the new technological and business envi-other firms from operating. ronment and in a way that is enforceable and credible

to the parties involved. Otherwise no telecommunica-Conclusions tions regime can be stable and viable. Telecommunica-

tions policy must become more explicit and indepen-dent of the operational responsibilities of the tele-

Virtually all telecommunications reforms being consid- communications entities. Day-to-day interpretationered by govemments around the world involve some and enforcement of policy requires a regulatory systemreduction in the monopoly control of the traditional that is, and is seen to be, fair and impartial.telecommunications entity and some increase in the in- In other words the regulatory system must be inde-

18 T7Yothy E Nulty

pendent of key interest groups yet provide a means for within which business can be done.all major interests to be heard; all competing interests None of the changes will be easy, but they must bemust gain something and must lose something-and attempted because the old regime in telecommunica-must be seen to do so; and regulation must be reasona- tions is no longer tenable-and they can be done. Thebly consistent and predictable-that is, it must follow resulting systems will reflect a reasonable proportion ofrules of law, precedence, evidence, and argument that the benefits of commercialization without failing tominimize surprises and caprice. Finally, regulatory au- take into account the legitimate political and socialthority must be strong enough to enforce its will and concerns inevitably connected with telecommunica-to ensure that there is a clear and stable framework tions.

Models of Service Competitionin Telecommunications

Karl-Heinz Neumann

The worldwide trend toward deregulation in telecom- cilities. From the standpoint of a policy option, I sug-munications is affecting networks, services, and cus- gest, this distinction between services and facilitiestomer premises equipment. Although the trend in the makes it possible and useful to allow full service compe-last is toward giving up network providers' formal tition while excluding network competition. I arguemonopoly positions and allowing unrestricted competi- that such a distinction can avoid wasteful duplicationtion, somewhat different attitudes exist about compet- of facilities and at the same time promote competitioning physical networks. More or less restricted network in the whole field of telecommunications and value-competition has been allowed in the United States, added services. To understand the real nature of serviceJapan, and the United Kingdom, but most other coun- competition and feasible policy options, we must firsttries seem to want to continue with one homogeneous examine the technical process of providing a service.national network infrastructure-although they like Telecommunications networks consist of transmis-the possibility of permitting various exemptions from sion and switching facilities that perform the basic tele-the network monopoly of the dominant carrier. The communications functions of transmitting and switch-major debate in telecommunications deregulation now ing information. The plain old telephone and telexrelates to service competition. Countries that are still networks were designed, constructed, and operated fordeveloping new models for telecommunications policy only these particular services. In this environment awant to liberalize the telecommunications service sec- competing service provider without any transmissiontor or at least the value-added services segment, which and switching facilities of his own was able only to re-is regarded as the most innovative segment of the sell or broker the underlying carrier services. He wouldwhole market. Different countries have chosen differ- operate by purchasing a service from a common carrierent ways of introducing, organizing, and regulating and reselling all or part of it to others without addingcompetition in this market segment. This chapter com- any value. Pure resale represents only a very small partpares various approaches and takes a more detailed look of the market. It offers only new pricing options andat the economic characteristics of telecommunications practically no new service options for the customer.and value-added services. The new pricing options are possible only if the carri-

er's underlying pricing structure is not cost based. TheServices versus Facilities Competition major economic effect of pure resale is to break downany discrimination in the rate structure so that in the

end any differences remaining in the rates for differentIn distinguishing between service and network compe- services are purely cost based.tition in telecommunications (the latter category is Without having some of one's own facilities it is im-often called "facilities competition"; see Bruce, Cunard, possible to provide enhanced or value-added services.and Director 1986 and Chapter 5 of this book), I assume In a typical situation, a service provider leases trans-that network carriers provide their services on their mission facilities from a network operator, uses his ownown facilities, whereas service providers use leased fa- switching facilities, incorporates service features, and

19

20 KarI-Hehz Neuman

adds value to his switching facilities. In a country In addition, this option raises the problem of resale,where such private service can be offered, the dominant which may endanger the telephone monopoly. One waynetwork operator has only a transmission monopoly of dealing with this problem (and the easiest) is to ig-and not a full facilities monopoly; this point is often nore it (Wieland 1986). This strategy permits a certainmisunderstood. amount of cream skimming. A second approach would

Integrated information switching and information require competing service providers to obtain from theprocessing are not limited to private service. Software- regulatory body licenses that describe their services incontrolled public switching technology allows and is detail and forbid resale by restricting leased lines andbeing used for the provision of both switching and pro- their connection to the public switched network. Acessing functions. Competition in telecommunica- third approach is to set tariffs for leased lines as a func-tions services thus involves different switching facili- tion of tariffs for the telephone service so that simpleties that are designed and optimized for different resale becomes economically unattractive (Schon andapplications. Neumann 1985). No further restrictions on the use of

leased lines and their interconnection to the switchedPotential Options for Service Competition networks would then be needed.

3. Monopoly on basic services and competition invalue-added services. In this case basic services must

Four major policy options permit various degrees of be defined and distinguished from value-added services.competition in services. Usually a value-added, or enhanced, service is defined

1. Unrestricted competition in all kinds of basic and as one that "combines basic service with computer pro-value-added services. This option maximizes the degree cessing applications that act on the format, content,of competition in the service sector and minimizes the code protocol or similar aspects of the subscriber'srange of regulation and the need for it. In particular, transmitted information, or provide the subscriber ad-this option entails no need to restrict resale and shared ditionai, different, or restructured information, or in-use and gives the user and competing service providers volve subscriber interaction with stored information"greatest freedom in using network services. (Federal Communications Commission 1980). A basic

2. Unrestricted competition in all services except service is, according to the definition of the FCC, the of-the telephone service. An argument in favor of this op- fering of a "pure transmission capability over a commu-tion is that the telephone service typically generates nications path that is virtually transparent in terms of80-90 percent of the revenues of a public telecommu- its interaction with customer supplied information." Asnications operator (PTo), and these revenues are needed the interrelationship between the two kinds of servicesto finance all of the nTo's social and political obliga- is defined, enhanced services are any services othertions. In some countries these obligations include sub- than basic services or any services which are added tosidies to the consolidated budget of the state, the postal basic services.service, and particular groups of customers. Other The history of regulatory approaches relying on thiscountries charge a fee according to a uniform tariff distinction, some understanding of technological devel-structure that is not necessarily cost based. In addition, opment, and common sense should make it clear thatsome people argue, a telephone monopoly is needed to formulating a definition that will be stable over time isensure the financial viability of the nos and to enable impossible. Nevertheless, some organizations, such asthem to finance the huge investment needed for future Intemational Business Machines (IBM) in Germany,network infrastructure. keep trying. The lack of clear-cut distinctions reflects

Before this option can be pursued, some definition the fact that there is a continuous spectrum of techno-of a telephone service is needed. A definition in present logical possibilities. Telecommunications technologyterms may be easy, given the current network technol- and service development figure in an evolutionary andogy and service spectrum. But what will a telephone dynamic process that defies analysis into sharp andservice look like in the integrated services digital net- static categories. Decisions regarding definitions arework (ISDN) environment? Will any combination of therefore almost always arbitrary, political, and tem-voice with other forms of communication be consid- porary.ered a monopoly, or will it be a competitive service? The resale problem is much more important withinWhat kind of service would telephony with background this option than within the previous option becausemusic be? Given the state of technological and market nearly all value-added services incorporate basic transdevelopment, a telephone monopoly may not be a sta- mission of information as a necessary component.ble future-oriented solution. There is, for example, a need to determine how much

Models of Service Competition in Telecommunications 21

basic transmission should be allowed in a value-added * Private networks for the intemal use of one com-service before it is regarded simply as a basic service pany onlyor as the resale of a basic service. This problem and oth- * Private networks for nonvoice communicationsers can be solved only arbitrarily because they lack a * Private access to satellites for internal use ortheoretical basis. Given the rate distortions in the basic nonvoice communicationsservices, however, service providers have many incen- * Cellular radio networkstives to engage in resale activities with quick andriskless profits instead of providing innovative servicesfor which demand is unknown and research, develop- Models Observed in Practicement, and marketing costs are high.

4. Monopoly on basic services and some value-added services. This fourth option accurately describes This section gives a brief overview of the different mod-the starting point for deregulation in many countries els of service competition found in some major coun-where some value-added services and especially tries or under discussion in the current debates on pol-network-related services were regarded as part of the icy reform.PTos' natural monopoly and the PTos were consideredto have some social obligations to provide value-added United Statesservices. (The externality issue, which was also in-volved, I will discuss later.) This option greatly extends In the United States, no basic or value-added service isthe monopoly in telecommunications. Its main theo- administratively exempted from competition. There areretical problem is that it does not clearly distinguish no formal barriers to entry into the services market.between the value-added services that should be pro- Simple resale of all kinds of basic services has been al-vided by a monopoly and those that should be provided lowed since the 1970s. The U.S. model comes close toin a competitive environment. policy option 1 above. Only the dominant carriers

These four basic policy options for organizing com- (American Telephone and Telegraph Co. IAT&T] and thepetition in services cannot freely be combined with Bell operating companies) at present face restrictionsmodels for organizing competition on the network side. on their value-added service offerings. To ensure fairFrom an economic standpoint, the most logical solu- competition, these carriers are now obliged to offertion is not to formulate different competitive models their enhanced services through separate subsidiaries.for networks and services but rather to allow unre- As a result of this policy, there has been no opportunitystricted market competition in both areas. Although it to develop some of the value-added services that haveis indeed possible to have unrestricted competition in been regarded as useful.services alongside a continued network monopoly, such The separate subsidiary requirement will be aban-a situation is pointless. Under a regime of unrestricted doned when the comparably efficient interconnectionservice competition, which includes resale and shared (CEI) or the open network architecture requirements ofuse, the network provider has no other option but to the Fcc's Computer III decision become effective (seechoose a cost-based pricing strategy for the services he Chapters 5 and 11). In correcting this particular regula-provides, so that he is denied the opportunity to finance tory policy, the Fcc is shifting from structural to non-far-reaching social or infrastructural obligations. If un- structural safeguards to achieve fair competition be-restricted service competition is politically feasible and tween services providers that own transmissionwanted, there is no reason for any kind of network mo- facilities and those that do not. In addition to the sepa-nopoly. The result is the same as with unrestricted net- rate subsidy requirement, the dominant carriers are ei-work competition. ther prohibited or restricted from providing informa-

If the political or regulatory process imposes social, tion services.infrastructural, or financial obligations on the telecom- Because there is no licensing requirement for servicemunications system, these obligations can be financed providers, there is little detailed knowledge about theonly through external subsidies or restrictions on number of services, competitors, and market volumecompetition in the services field. A monopoly in the available; it is, however, quite clear that in addition toservice market (inc]uding telephony or basic services) several hundreds of resellers, the United States has ais not compatible with network competition. Some wide range of value-added services of all kinds (Noamof the following exemptions from a network monop- 1986). The market volume and numbers of these pro-oly are possible under a sustainable telephone viders are changing yearly and depend largely on themonopoly: majot carriers' tariff policies.

22 Karl-Heinz Newmann

Japan services. Competition will be allowed only in the areaof value-added services (option 3), where the trr will

The new Japanese regulatory model for telecommuni- also be allowed to compete. Resale of basic services willcations distinguishes between Type I and Type II be prohibited. Bearer services will be regarded as basictelecommunications businesses (see Chapter 7). Type services, according to the definitions of the Interna-I businesses supply telecommunications services; on tional Telegraph and Telephone Consultative Commit-their own circuit facilities. Type II carriers provide ser- tee (ccTrr), including telephony, telegraph, telex, datavices on transmission facilities leased from Type I carri- transmission, packet switching, and special services forers. There is thus no distinction between different value-added carriers. Value-added services will accord-classes of services, nor are any particular services re- ingly be services above the level of the open system in-served for Type I carriers only. terface (osi) model. To control resale restrictions pro-

Type II businesses are further subdivided into special viders will be regulated by a licensing process.Type II and general Type II businesses, depending onthe scale of facilities or coverage area and the kinds of United Kingdomcustomers. Special Type 11 carriers are often calledlarge-scale value-added networks (VANs), and general Liberalization of telecommunications in the UnitedType II carriers are called small-scale VANs; both can, Kingdom began in 1981 in the value-added services sec-however, provide any kind of basic service. They differ tor when the government allowed private VAN servicesonly in the degree of regulation. Although special Type to be provided on the basis of a general license. A yearII carriers need an entry and tariff registration, general later a second network carrier, which continues to beType II carriers are required only to notify the Ministry allowed to provide any kind of service, was licensed.of Posts and Telecommunications (MPr). They are not Generally, therefore, competition is possible in alltariff regulated. Since the enactment of the new Tele- kinds of services. Competition in the telephone servicecommunications Business Law in 1985, 17 special Type is, however, limited by the exclusion of simple resale.II and nearly 500 general Type II carriers have been li- The U.K. model is, therefore, closer to option 2 thancensed (see Chapter 7). The Japanese situation can only to option 1. Nearly 1,000 services provided by about 200be expected to converge to policy option 1 described suppliers have been licensed under the VANs general li-above. Nippon Telegraph and Telephone Corporation cense, yet it is estimated that the market volume for(NWl), the dominant carrier, already has a strong posi- VANs in the United Kingdom amounts to only $60 mil-tion in the value-added services market (Komatsuzaki lion (Carter 1987).and Yamashita 1986). Late in 1987 a new so-called class license for value-

added and data services was published. This licenseFrance opens up the services market to a larger degree and

now includes data services. At the same time, however,The French Ministere des Postes, Telegraphes, et greater obligations are being put on new services pro-Telephones (prr) still has a far-reaching monopoly in viders.the services sector. Generally, private value-added ser-vices may be provided only on the public switched net- Gennanywork. Leased lines for these services are available onlyif it is not possible to use the public switched network. Despite differing national and intemational assess-Resale of public services is generally forbidden. The ments, there is a significant and growing value-addedcurrent reform debate has focused on liberalizing the services market in Germany. Little is known about thevalue-added services market and, to a minor degree, on volume of this market because no licensing process haspermitting the entry of altemative network carriers. been applied to it until now. According to a recentThere seems to be a consensus that the monopoly study that analyzed the German value-added servicesshould be retained on some basic services. Thus the market on the basis of the enhanced services definitioncurrent situation in France can best be explained by in the United States and the VANS definition in thepolicy option 4; a move toward option 3 may be ex- United Kingdom, this market differs little from thatpected in the future. in the United Kingdom or the United States (Heuer-

mann 1987). Several hundred services providers areNeterlands presently offering home banking, electronic fund trans-

fer, reservation, remote data processing, online dataThe Netherlands has decided against network competi- bank services, information services, electronic mail,tion; the Prr remains the monopoly provider of basic telesoftware, video conferencing, protocol conversion,

Models of Seyvice Competitior i fha t

and many other services. The Bundespost, whose major which are often called basic services. Lee- service offerings are videotex, mailbox, telemetry, and seems to have been giver to the eco c'X'-- ovideo conferencing, has only a small share in the value- value-added services and their relationsni," p a: .r f_

added services market. The current situation in Ger- ferences from basic services. To hbelp fili -hle ,2A.t,; LkIsmany can best be explained by option 4. section analyzes value-added seivices with the

Restrictions in the service sector pertain primarily major economic concepts in order to incrWse~ unWerto voice communications. The Bundespost intends to standing of service competition and the n; re, uabandon further resale and interconnection restrictions lation if it exists.and introduce a leased-line tariff policy approach. Thisapproach aims to avoid cream skimming not by resale Economies of Scale in the ProvLkionarestrictions but through tariff policy. It "tries to create of Value-Added Serviceseconomic incentives such that new service providerscan only operate profitably if their costs are lower, if Most value-added networks consist of leased itnes mndthey offer services of a better quality, or if their services switching nodes that perform the swithhe mare innovative and different from those of the common tion and incorporate the intelligence orcarrier" (Neumann and Wieland 1986, p. 127). value added to that service. Customer. ,

In the current reform debate in Germany, there is cess these networks through the switched pubaHc net-discussion of a model of service competition that lim- works. Examples of such value-added ierk,sces areits the network operator's monopoly to the telephone the Society for Worldwide Interbank ,service and opens up all other services to private com- communications (sWFr) network of lie ba,n- eaadpetitors. According to this model, the Bundespost the Sociiti Intemationale de limun

would be compelled to offer a set of politically defined A4ronautiques (sITA) network or' i± .

basic services besides the telepione service under Othervalue-addedservices,suchasonline&,-ta H-enav.regulatory constraints and would, in addition, be al- vices, mailbox services, and 3nformaL'Tilowed to offer any other services unregulated. Private depend only on the public svAit:ched services providers would be allowed to offer any service nications services and a central compu .er Lo £ roces.sexcept the simple telephone service. the information in ways that these servn . cn <

Both kinds of value-added services zr,.European Commission ized by economies of scale that difeT id te

structure.In the recently published Green Paper (Commission of In value-added services based on l'e6t 1:n,s e!Z cthe European Communities 1987, p. 19), the European mies of scale occur in two ways. rirst, terCommission has recommended a uniform telecommu- the probabilistic structure of traffic. h, `e-sr henications development for Europe. The purpose of this traffic transmitted on a leased Iii.e, imse -r ;paper is "to start a common thinking process and to be its use, and the more lines used in any '3nn j 'I'e

a basis for discussions aimed at the achievement of greater the effective capacity of any ghV'tf, 'i- 'at

maximum synergy between current developments in system. Telecommunications eng6neezs are. ft554f:'1,7 5:,

the Member States." The paper argues in favor of a sub- with this phenomenon from traffir Uheo. ad o st

stantial opening of the services market to competition. tistical law of large numbers. Theo etLaNevertheless, the paper also suggests that a limited economies of scale apply to services offezdl u '

number of the basic services needed to satisfy public work provider just as they apply io s.tr' ves o=i. d service goals must be exempted from competition. private services providers. The economE-r

Basic services that would be provided on a monopoly services are, however, exhaustedxwbasis would, however, be essentially restricted to voice possible on physical transmisshon o; me/telephony. The commission's recommendations are by the services provider himself. Yet . ' ,

very close to the policy model currently being discussed important where the network consist5 0('' ain Germany. lines.

Second, economies of scale resu i & e,e 0,

Economic Characteristics of Telecommunications the witching ad intelligence umtServices and Service Competition a given value-added service. Until use r,ac a

level, the average cost per line of this Lcreases. Such economies of scale asEL oCUm I. ..se

The debate on the economic nature of telecommunica- of services that are based only on rii fc'

tions services has so far focused on traditional services, services.

24 Karl-Heinz Neumann

Economies of Scope between that of a Pro; such economies of scope may, however,Differen, Value-Added Services be substantial in case of an ISDN.

The common use of facilities helps exhaust the econ-A value-added service provider usually concentrates not omies of scale that result from the use of these facili-on one particular service but rather on a special set of ties; when these facilities are used for different services,services. In the United Kingdom, for example, as rnen- however, cost advantages result instead from econo-tioned earlier, about 1,000 services licensed under the mies of scope between basic services and value-addedVANs class license are provided by about 200 services services. These economies of scope allow a PTro to pro-providers. On the average, then, each provider is offer- vide a value-added service in combination with its basicing five services. The dominant carrier, British Tele- services at an incremental cost that is lower than thecom, which also seems to be the largest single va,lue- stand-alone cost to a services provider. Because of theadded services provider, is offering an even broader importance of these economies of scope, the Fcc aban-variety of value-added services. One reason for the joint doned the separate subsidiary requirement for domi-supply of several services is the existence of econo- nant carriers in its Computer III decision. This regula-mies of scope between different services (that is, cost tory restriction had increased AT&T's cost and hadsavings resulting from a single entity providing blocked the supply of some value-added services.several services) that result from the common useof facilities such as computers, data banks, and le,ased Economies of Scope betveen Value-Added Serviceslines. and Nontelecommunications Activities

Economies of Scope between Basic Services Most value-added services are not provided by PTOS.and Value-Added Services Some private telecommunications operators have an

incentive to enter the business because of the econo-The digitization of the telephone networks and most mies of scope that exist between value-added servicescertainly the introduction of the ISDN is making the and their particular nontelecommunications activities.basic network infrastructure more and more intelli- Banks, for instance, may offer home banking using tele-gent. Modem switching equipment is often regarded as communications services. Publishers have compara-a computer designed for special applications. This part tive advantages in offering telecommunications-basedof network technology most prominently demonstrates information services that use their information re-the technological convergence between computers and sources. A company may reduce its costs by sharing itscommunications. Increasingly, modern switches are data processing center with others via telecommunica-able to perform not only information switching but also tions.information processing functions, such as storing, pro- Here again, the incremental cost of producing thecessing, and code, speed, and protocol conversion. value-added service together with other business activi-Compared with the pure switching function, the ability ties is lower than the cost of providing the same serviceto perform additional functions at the same time and on a stand-alone basis. The incremental cost may orwith little incremental cost increasingly enables the may not be lower than the cost of providing the samePTos to use their basic service network facilities to pro- value-added service together with basic telecommuni-duce value-added services. cations services. Usually it will be lower. One reason is

In this area, economies of scope can be achieved in that the telecommunications component of a value-four different ways: added service is usually much lower than 50 percent

and in many cases is lower than 10 percent of the over-* The shared use of transmission lines that can also all cost of the service.

be used for basic services* The technical know-how for the construction of Complementarities between Value-Added Services

networks and services and Other Products* The marketing of value-added and basic services* Transaction costs on the demand side The equivalent of economies of scope on the supply side

are complementarities on the demand side. The mostEconomies of scope, which relate to transmission iand obvious example is computers and value-added ser-switching facilities, are least likely to occur if the lPTO vices. The complementarity between these two prod-provides the value-added service in a special network ucts may be so significant that a computer and a corres-with special transmission and switching facilities. The ponding value-added service may be regarded as onestarting point for a new provider then differs little from service (Neumann and Wieland 1986). The complemen-

Models of Service Competition in Telecommunications 25

tarity may be so strong that a computer manufacturer Externalities demand price structures that are not al-will want to subsidize his own value-added service offer- ways sustainable and may be vulnerable in a competi-ings in order to achievc better sales for his computers. tive environment. Optimal pricing in the case of exter-In such a case, there may exist incentives for the com- nalities, for example, requires that access charges toputer manufacturer rather than the service provider to the service be set below cost. To finance this subsidy,engage in predatory behavior in the market for value- usage charges must then be set above cost.added services. Whether such behavior really occurs Significant externalities may cause a second problemwill depend on a number of market conditions (Willig, in a competitive environment. Each interactive serviceOrdover, and Sykes 1984). Nevertheless, it is important requires a critical mass of subscribers before a self-to remember that, because of complementarity on the reinforcing growth process can set in. This criticalsupply side, anticipatory behavior can also be expected mass phenomenon depends not only on the subscribersand not only from the network providers. but also on the different service providers and the rela-

tionship between them. The situation is exemplified byEconomies of Scope versus Economies the so-called basic value-added services, which gener-of Specialization ally provide only the infrastructure for other services.

The best example is the videotex service, whose attrac-Economies of scope find a counterpart in economies of tion for subscribers increases with increases in thespecialization. Economies of specialization occur when quantity of information or transactional services that itthe decentralization of economic activity leads to de- provides. The interest for the potential service providercreasing costs in comparison with its centralized real- also grows as the number of subscribers with access toization. Economies of scope and scale provide potential the service rises. This critical mass interrelationshipfor cost savings with joint or separate business activi- can, in the case of a monopolistic supply, interfere withties. In contrast, economies of specialization may occur the successful development of a service. Tariff issuesin different business activities of a firm, for example, notwithstanding, this problem to a large degree ex-in management, strategic planning, procurement, fi- plains the unsatisfactory development of videotex innance, and, perhaps most naturally, marketing. Spe- Germany. The difficulties are aggravated further whencialized management or a specialized firm may have two or even more suppliers try to develop such basiclower costs or may be able to meet market demand bet- value-added services in competition with each other.ter than a centralized large firm. The probability of getting a critical mass of subscribers

Economies of scope and economies of specialization decreases with the number of competitors. This analy-usually occur together; one may, however, result in sis can to some degree account for the underdevelop-greater cost savings than the other. In practice not only ment of the telex service in the United States, wherethe theoretical existence of the respective economies is three independent service providers have not been ableof importance but also their rate of exhaustion in each to attract as many subscribers among them as theparticular situation. Bundespost has been able to get on its own in the Fed-

eral Republic.Externalities and Value-Added Services

Pricng Issues of Value-Added ServicesInteractive value-added services, like any other tele-communications services, are characterized by network Although externalities affect the pricing structure in aextemalities. The value that a user places on having ac- competitive environment, such problems of pricing tele-cess to a particular value-added service varies (in case communications services usually result not from pureof extemalities) directly with the number of users of economic considerations but from social obligationsthat service. Each new subscriber produces an external such as the need to cross-subsidize special user groups.benefit for all the others. As the penetration rate of po- A conflict of interest occurs when these social obliga-tential subscribers increases, the value of subscribing tions must be fulfilled while competition is being intro-to the service also increases. duced or is being allowed to intensify.

These extemalities, which are very common in tradi- The demand for value-added services should not betional telecommunications services, are more compli- subject to distributional concerns, because a large partcated in the case of value-added services (Phillips 1987). of this demand stems from business users. For the pri-In the case of videotex, for example, the value of the vate household value-added services seem, at least forservice to any one subscriber depends not only on the the present, to be more a luxury than a basic need. Fornumber of other subscribers but also on the range of both reasons prices for value-added services should beservices to which each subscriber has access. set purely according to economic criteria.

26 Karl-Heinz Neumann

For reasons given below, prices cannot be set simply tween services and facilities competition thereforeat their marginal cost level. Because of economies of does not hold in practice.scale and innovation, such a simple pricing scheme * Policy options in the services sector cannot freelywould generate losses for the firm. Another reason for be combined with policy options [or organizingnot pricing according to marginal cost relates to the ex- network competition.temalities associated with value-added services. If the * Policy options that rely on service distinctions forpricing structure is such that it allows access to the regulatory purposes do not seem to be stable overservice to be priced differently from usage, then the time and require a high degree of potentially inef-price for access should be subsidized by the price for ficient regulation.usage. In the case of multiproduct production, the rev- * Value-added services in general seem to have theenues generated by a value-added service should at least.. .. ~~same economic characterisltics as basic telecom-cover the incremental cost of that service and should munications services, including economies ofbe set below the stand-alone cost of providing that ser- . . .vice, in which case no customer group is paying or re- scale, economies of scope, and externa-lites.ceiving subsidies. Given the changing demand interre- * Economies of scale, economies of scope, and ex-lationships over time, profit and welfare optimal pricing termalities may be of even more importance forschemes require prices to be set below costs during the new value-added services than for traditional tele-initial phase of a particular service and above cost in communications services. In an environment ofa later period of the product's life cycle. In the case of unrestricted competition, these characteristics ofdemand complementarities, profit and welfare optimal value-added services may cause conflicts tlhatvalue-added service prices may even be set below cost. must be resolved to ensure eicient developmentGiven that all these different pricing issues can occur of these services.together, it is hard to imagine how a regulatory author-ity can distinguish between optimal and predatory pric-ing schemes for value-added services. n

What implications does the analysis presented so far eferenceshave for the competitive environment in the value-added service market? First, in their economics value- Bruce, R. R., J. P. Cunard, and M. D. Director. 1986. Fronadded services are quite similar to basic telecommuni- Telecommunications to Electronic Seraices. A Globalcations services. There may be economic barriers to Spectn= ofDefinitions, Bowzdary LMes, and Srfctures.entry into this market, which may require regulation. Sevenoaks, Kent: Butterworth.Economies of scale for particular value-added services Carter, St. 1987. "The Deregulation of Telecommunicationsmay be so strong that they justify a natural monopoly. in the United Kingdom." In F. Arnold, ed.), Ozne 87.Similarly, economies of scope between basic and value- Hamburg.added services may be so significant that a potential Commission of the European Communities. 1987. 'Towardsnatural monopoly for a basic service may also apply to a Dynamic European Economy." Green Paper on the De-particulay value-added services. velopment of the Common Market for Telecornmunica-

ions Services and Equipment. COM (87) 290 fina. Brus-sel, June.

Conclusions Federal Communications Commission. lS80. 'Second Com-puter Inquiry, Final Decision." Amendment of se. 64.702

- ~~~~of Rules and Regulations 77 FCC 2d:384, 420. Washington,Much research is still required to answer satisfactorily D.C.all the questions mentioned above. Nevertheless, a 1ew7r.Cn

points are obvious.* ' Heuermann, A. 1987. 'DeT MarEst fiir- Mlehrweridienste in derpoints are obvious. Bundesrepublik Deutschland." Diskussionsbeitrag zur Te-

* Telecommunications-based services seem to be lekommunikationsforschung des Wissenschaftlichen nsti-the most innovative and fastest growing part of tuts fiir Kommunikationsdienste der Detitschen Bunde-the telecomost in ativeoand fastestmgrowingparteof spost, No. 25. February.the telecommunications market. Komatsuzaki, S., and Y. Yamashita. 198U. &alue-Aded r-

* The competitive and regulatory environment in vices in Japan." In Dokwnentagon der .i,c*knferarz

this market segment determines the future devel- Value-Added Services.' Munich: Miinrhner Kres, Ju1y.opment of telecommunications in each countiy. Neumann, K.-H., and B. Wieland. 1986. "Competition and

* Services competition in telecommunications can Social Objectives: The Case of West German Telecommuni-also lead to a duplication of telecommunications cations." Telecommunications Policy 10.121-31.facilities, and the often stressed distinction be- Noan, E. 1986. "Value-Added Services in den USA.' In

Models of Servke Comrpetiion i Telecowinkations 27

Dokumentation der Fachkonferenz 'Value-Added Ser- Wieland, B. 1986. 'Current Trends in Telecommunicationsvices." Munich: Munchner Kreis, July. Policy." Internedia 14(6):13-18.

Phillips, A. 1987. "New Technologies and Telecommunica- Willig, R., J. Ordover, and A. Sykes. 1984. "Non-Price Anti-tions Services: Policy Problems in an ISDN Environment." competitve Behavior by Dominant Firms towards the Pro-Private communication. ducers of Complementary Products." Discussion Paper in

Schon, H., and K.-H. Neumann. 1985. "Mehrwertdienste in Economics, No. 67. Woodrow Wilson School, Princetonder ordnungspolitischen Diskussion." Jahrbuch der Deut- University, Princeton, N.J., February.schen Bundespost 36:478-527.

4

Regulatory Policy for TelecommunicationsTimothy E. Nulty and Eric Schneidewind

The global revolution in telecommunications technol- other countries are moving in this direction (to one de-ogy and the resulting explosion of demand for telecom- gree or another), common sense dictates that wemunications service is generating severe pressure for should examine U.S. experience closely for useful les-change in the structure of the telecommunications in- sons. We focus on regulation at the state level becausedustry. Many countries at all stages of development are we believe that a majority of the practical, down-to-considering reorganizing telecommunications services earth regulatory tasks that are most pressing and mostto achieve higher growth, greater independence, and relevant for developing countries are performed in themore commercial discipline of operating entities. This United States by the states and not by the FCc-a factoverhaul is necessary and desirable. Such reforms have little known outside the United States. Another reasontheir own problems, however. In particular, new mech- is that, because the states exhibit different economic,anisms are needed to reconcile (a) sensitive national demographic, and geographic characteristics, they haveand social interests with the imperatives of profit- served as regulatory laboratories for a vast number oforiented businesses and (b) the need for competitive different approaches over the years. This experiencediscipline to prevent abuse of monopoly positions constitutes an invaluable resource for other countrieswith the economies of scale inherent in many tele- that are unaccustomed to the problems of regulatingcommunications activities. Effective regulation needs commercially oriented telecommunications entities.to be developed. (For further discussion of this Nevertheless, we wish to emphasize that we have usedpoint, see Chapter 2.) Any of a number of possible this reservoir of experience both selectively and agnos-regulatory systems could be effective, depending upon tically; we have drawn on only those aspects that we feelthe country's specific circumstances. In this chap- are relevant and valuable in the context of developingter we will outline in an orderly, pragmatic, and non- countries. In particular, we believe that the experienceideological way the basic regulatory tasks that need of traditional regulation in the United States-the reg-to be performed and possible schemes for executing ulatory scheme that obtained during the many decadesthem. when the U.S. telephone system was being built rather

In examining regulatory options for developing than the changes that have captured the headlines incountries, we have drawn heavily on the U.S. exper- the last few years-is most relevant to the circum-ience-especially with regard to state regulation as cp- stances of developing countries.posed to national regulation by the Federal Communi-cations Commission (Fcc). We have done so not Reforms under Considerationbecause the United States provides a perfect model for Deloping Consiesother countries but rather because the United States by Developing Countriesand Canada are the only countries with a long track rec-ord of operating the telecommunications sector as a To meet the numerous pressures on telecommunica-mixed private-public system of government-regulated tions entities and their govemments, some developingcommercially oriented companies. Inasmuch as most countries are considering a variety of reforms.

28

Regulatory Policy for Telecommunications 29

Nature of Refonns available in an integrated system, and will preventgrowth of a nationwide infrastructure. Sector reforms

The reforms fall into two broad categories. First, there (like entity reforms) therefore generally occupy someare various changes in the organization of the telecom- point on a continuum of compromises between abso-munications entities themselves that are intended to lute monopoly for the traditional enterprise and com-improve the efficiency, flexibility, and energy with pletely open competition. Currently, most developingwhich they operate. These fall along a continuum and countries are near the former position but are consider-range from minor loosening of the bureaucratic re- ing movements toward the latter.straints on existing government telecommunications Both classes of reform are necessary, even unavoid-departments to the creation of independent state- able, but both generate serious new problems of theirowned corporations to the introduction of private capi- own. First there are the national and social issues. Thetal in them. For any given developing country, reform quality, penetration, and reliability of the telecommu-consists of moving from the country's current position nications system is immensely important for nationalon the continuum to some point further along in the security in all senses of that term-military and civil-direction of greater independence and commercial ori- ian, domestic and international. Furthermore, tele-entation. Indeed, the term "privatization" has, in effect, communications has become, in developed countries ascome to mean virtually any movement in this direction, it will inevitably in the developing countries as well, anwhether or not it involves actual private control of the essential public service without which neither privatetelecommunications entity. individuals nor companies that need the widest possible

The second class of reform concerns the organization contact with suppliers and customers can participateof the sector and the role for other suppliers. In addi- fully in society. As is the case with other classic publiction to the equipment market, especially customer goods (for example, fire protection, education, water,premises equipment, a number of service markets are and police), a telecommunications system that reliesactually or potentially open to competitive entry. These solely on private, competitive firrns will tend to be bothinclude (a) resale of services of the main network (ei- inadequate overall and too unevenly distributed to meetther as is or with some added value, such as call for- the needs of society as a whole.warding, special billing, different tariff options, or data The second category of problems created by reformnprocessing); (b) the building and operation of dedicated centers around economies of scale and potential fornetworks to serve a single customer or group of cus- monopoly abuse. Telecommunications is not like thetomers; (c) the building and operation of small local restaurant, taxicab, or dog food business. Economies ofadd-on networks that connect to the national network, scale, although of disputed magnitude (and continuallyand (d) plant maintenance and construction. changing with technology), do exist and are signifi-

cant. When an existing telecommunications entity isPolicy Issues reorganized toward greater independence and commer-

cialization, it typically remains the overwhelminglyReal or potential competition creates a number of pol- dominant player in the telecommunications marketicy dilemmas. On the one hand, if no competitors are even if it does not retain an explicit monopoly. Its exist-permitted, increased autonomy for the telecommunica- ing network was paid for by users and taxpayers and wastions entities may simply lead to greater exploitation of acquired on favorable terms, so that it has extremelymonopoly power. In this case, the purposes of reform- low marginal costs in any given market where it maying telecommunications entities-efficiency, innova- confront a challenger. Together with control over keytion, and flexibility-may be aborted. Reforms that bottlenecks, the existing entity usually has an array ofgrant greater autonomy to the telecommunications en- weapons sufficient to defeat any rival if it is permittedtity are thus generally accompanied by other actions unfettered freedom to wield them. Thus there is thethat give more scope to alternative suppliers. On the possibility that a reformed telecommunications entityother hand, if unrestrained competition is permitted, will defeat the very purpose of the reforms that createdeither (a) the telecommunications entity may destroy it and will still make large profits by giving poor servicethe competition by abusing its dominant market posi- for very high prices in an unchallenged monopolytion and its control over key bottlenecks (so that the context.first situation cited above is recreated) or (b) competi-tors may succeed in selecting only highly profitable Reconciling Policy Contradictionscustomers, so that the main telecommunications entityretains the loss makers. This situation will lead to un- Under the traditional organization of telecommunica-even development, will undermine economies of scale tions systems, these many contradictions were recon-

30 7imothy E. Nulty and Eric Schneidevind

ciled directly within the single political body that lboth cymakers will recognize a distinction between two as-operated the telecommunications system and made so- pects of the balancing task: (a) the establishment ofcial, national, and economic policy: the government. broad telecommunications policies and (b) regulation,One may or may not agree with the wisdom of decisions that is, detailed interpretation of the policy in specificmade in any particular instance, but the fact remains cases, enforcement of the law, and resolution of dis-that a workable mechanism existed to strike a balance putes. The policy function is fundamentally political (inbetween the considerations of operational efficiency, the broad sense of that term) and hence is properly andnational security, social equity, and competitive disci- inevitably the function of government. Responsibilitypline and to enforce that balance. for it should be clearly vested in a suitable govemment

The organizational reforms that give greater auton- agency with sufficient political stature and sufficient ex-omy (from the political process) and commercial orien- pertise to be credible. In the remainder of this chaptertation to telecommunications entities necessarily un- we will focus on the second aspect, the regulatory func-dermine the mechanism for striking and enforcing a tion. This function is (or should be) less political andbalance within the entities. Yet a balance must be more objective. As such, it could reside in govemmentstruck-all of the contradictory interests are imlpor- (for example, in a separate department of a ministry)tant, and none can be ignored without serious conse- or in a special branch of the judiciary, in an indepen-quences. dent quasi-judicial agency, in joint industry groups, or

Governments thus face a complex dilemma: in order in a combination of these. Regardless of the institutionto respond to the growing technical and economic involved, the regulatory function must be exercised inpressures, they must give their telecommunications an obviously impartial, predictable, expert, and strongentities greater autonomy and commercial orientation. fashion.But important national, social, political, and economicinterests will be jeopardized by the move to miore Four Principal Regulatory Activitiescommercial modes of providing telecommunicationsservices.

Until about ten year ago, the historical trend was The dominant telecommunications entity, whetheraway from commercial provision of telecommunica- govemment owned or private, should be authorized totions services and toward government control. The rea- do business, raise capital, and plan future operationsson was a perception that private telecommunications with as little intemal interference as possible and prac-companies exploited their monopoly position by provid- ticable from either the policymakers or the regulatorying inadequate service at excessive prices and ignored bodies. In tum, the authority of the regulatory bodiesimportant political and social concems. If telecommu- to interfere with operations should be limited to thenications services are successfully to be moved back minimum necessary to ensure that broad goals of na-into a more market-oriented mode of operation that is tional telecommunications policy are carried out, thatalso stable and viable, the problems that led to national- service meets established standards, and that pricesization in the first place must be addressed. It is unfair charged do not exceed reasonable levels (including anyand untenable to require telecommunications services nationally mandated surcharges to finance publiclyboth to be more commercial and at the same time to mandated goals). The regulatory bodies should alsobalance commercial interests against political or social have the authority to obtain the information from theconcems as they have in the past. But, since someone telecommunications entities necessary to meet thesemust do this balancing, the move toward greater com- obligations.mercial orientation must be accompanied by the devel- To accomplish these ends, experience has shown thatopment of other credible and effective mechanisms to four basic regulatory activities are essential if reason-carry out the balancing function; otherwise reform and ably priced telecommunications services of high qualityrestructuring of the telecommunications sector will are to be had from commercial entities.not be stable or sustainable.

Fmnchise RegulationPolicy and Regudatory Responsibilities

Where more than one carrier may wish to provide ser-There is no single correct blueprint for such a mecha- vice to the public in a geographic area, some agencynism; each country must find its own solution. Certain must decide the geographical or technical boundariesgeneral themes and characteristics, however, are likely to be served by each one so that service territories doto appear in most successful systems. First, most poli- not overlap and facilities are not duplicated. Underlying

Regulatory Policy for Telecommunications 31

this approach is the assumption that there is too little duce or eliminate the ability to replace worn equipmentdemard or too littie capital to build more than one or expand service. Small or unsophisticated carriers arehigh-quality telecommunications system in a given often unaware of proper depreciation practices or facegeographical area. (Although this basic proposition is political and social pressures for low rates that cannotincreasingly being questioned in some advanced indus- be resisted. This is commonly the case in developingtrial countries, it remains almost certainly true for de- countries and occurs elsewhere as well. Small electricveloping countries.) Before franchising can be mean- and telephone cooperatives serving rural areas of theingful, however, the government agency granting an United States, for instance, typically seek state regula-exclusrve fran hise must usually be prepared to with- tion of rates in order to bring a powerful force fordraw the monopoly granted or to restrict it if service higher rates into play to counter the political pressurebecomes inadequate or rates excessive. from customers to prevent rate increases. A strong

Whether a government opts for a monopoly system regulatory body must play-and must be seen asor for a competitive system without exclusive fran- playing-a middle role: it prevents abusively high rateschises, there must be the legal ability to reevaluate this but also protects the entities from being forceddecision in iight of operating experience. A theoretical to charge rates too low to finance maintenance andapproach is of no use if telephone service is poor and investment.unavailable to new customers. A govemment agencymust stand ready to address these problems by mandat- Enforcement of Quality Standardsing increased or decreased levels of competition andother necessary refo rms. Assignment of radio (including microwave) frequencies

and rights-of-way involves allocation of a valuable butRate ena Traff Ragyuation scarce commodity that is controlled by government.

Failure to exercise this authority will inevitably resultUtility rate and tariff regulation by government agen- in poor signal quality or damaged cables. Privatecies is often described as a substitute for competition. groups do not usually have the legal authority or politi-This description is appropriate where investor-owned cal strength to force a frequency or right-of-way to becompanies with strong profit motives are given the ex- allocated so that one entity or group benefits at the ex-clusive franchise to serve a geographic area. In the ab- pense of another. Yet some system of allocation is insence of competition, some powerful force is necessary the interest of all parties.to prevent the monopoly carrier from raising the cost Tclecommunications systems involving more thanof service to unreasonable levels. A subtler role consists one operating entity must use and enforce uniformof examining tarifffs to ensure that no class of custom- standards of performance for transmission and termi-ers or geographic area bears an unreasonable portion nal equipment. Without standards, the system wouldof the costs of a telecomrmunications system that serves operate poorly, if at all. In some cases, private societiesmany geographic areas and classes of customers. of engineers have assumed the role of formulating ap-

The advent of com£petition has created a new type of propriate standards for virtually any kind of telecom-rate issue in situations where monopoly entities inter- munications system. This can be an effective approach,connect with ofter carriers, in which case the "cus- but some agency or govemment body with specific legaltomer" is also a competitor. In these instances, the tele- authority must oversee, coordinate, and enforce thecommunications entity may be tempted to use the price standards. Once again, valuable property rights are in-of access to its facilities as a competitive weapon and volved, and self-interest is often not sufficient to ensureto charge zither unreasonably high rates or unreason- voluntary cooperation. As with tariffs, the advent ofably low ones (depending on the situation) in order to competition has made control of (and informationdiscriminate among other carriers. Oversight by a gov- about) technical standards an economic weapon. Aseminent agency is one means of preventing the monop- competition grows, there is a growing need for a refereeoly carrier from charging unreasonable or discrimina- to make sure that there is fair dealing and no discrimi-tory prices and is an increasingly important function nation.for regulatory bodies everywhere. If there is more than one operatinig entiy, number-

The most paradoxical rate regulation task of all re- ing plans must be compatible. Compatible numberinglates to the need to keep telecommunications charges plans can be achieved through cooperation withoutadequately high. It is ironic but true that even privately government intervention. The operating entity's self-owned monopoly telecommunications carriers often interest appears to coincide with public interest in thisfil t.o charge enough for services. Inadequate rates re- case, and a permanent direct government role may be

32 Timothy E. Nulty and Eric Schneidewind

avoided. A forum must be provided, however, to ensure in the political wind. Ultimately, nothing is more nec-that a responsible plan is adopted to resolve disputes. essary for a capital-intensive industry such as telecom-

munications than a stable, predictable environmentDivision of Revenues and rules of behavior, and nothing is more damaging

than roller-coaster changes in the operating compa-When a telecommunications system includes more nies' business environment. Tolerance of some reason-than one operating entity, revenues from calls between able regulatory discipline is a fair price to pay for acarriers must be divided. The division of revenues is strong buffer between the operating entities and politi-typically accomplished nationally or internationally by cal pressures.negotiation among operating entities. This procedure The following sections illustrate how each of the fourmay be entirely satisfactory unless one partner in an in- basic regulatory functions could be performed underterconnected system has disproportionate economic or different degrees of privatization or liberalization.political power and uses it to discriminate between in-terconnected entities. Such a case would require inter- The First Case: Regulating a Single Publiclyvention or a credible threat of intervention by govern- Owned Monopolyment or by an influential third party. In developingcountries, interconnection disputes most often arisewhere the international operator is separate from the Franchise regulation and supervision of a division-of-domestic operator. In such cases, the former typically revenues process are unnecessary when only one opera-bears a small part of the total cost, carries the most lu- ting entity serves an entire country or political sub-crative traffic, and yet pays a disproportionally small division.charge for access to the domestic network. The resultis often strong pressure to merge the two entitiies. Regulation of RatesBetter regulation of the interconnection charges tndterms, however, can resolve the conflict equally well. No person or government agency has discovered a sim-

ple and effective way of guaranteeing that a monopolyImplementing the Four Regulatory Functions utility (either publicly owned or privately owned) will

deliver high-quality service at reasonable prices. Tradi-The greater the degree of autonomy and commercial tional merchandising has become even less useful asorientation of the telecommunications entity, and the the number of alternative providers and the range ofgreater the role of competitive operators and suppliers, services have increased. As a result, the current think-the more need there will be for explicit independent ing maintains that competition should be enlisted toregulatory mechanisms to reconcile private interests some degree so that providers are forced to meet thewith social and national needs. Both sides have an legitimate needs of customers at cost-based prices.equivalent interest in such a regulatory mechanism. Several typical problems of the publicly owned mo-Government needs a way of ensuring that minimum nopoly utility should be addressed directly whereverpolitical, social, and national concerns are met witholut possible. Public ownership is inevitably accompanied byits having to involve itself in day-to-day management strong governmental pressure to keep customerof telecommunications activities. At the same time, tele- charges as low as possible, to minimize investment socommunications providers need to be sure that politi- that scarce capital may be used for other, higher priori-cal pressures will not continually intrude in business ties, and to make operating decisions on the basis ofdecisions. political objectives that may or may not coincide with

As the institutional gap widens between the market- sound operating practices for a utility. No magic for-place, providers of telecommunications services, and mula will prevent these problems from occurring, butthe political caretakers of national interests, there is a combination of techniques can greatly improve thecorresponding growth in the need for a credible, expert, situation.and independent buffer or intermediary. A telecommu- It is of fundamental importance for a public utilitynications entity may think it is better to rely on short- to be organized as a corporation that, whether or notrun back-door influence over govemment than to face the state owns the majority, is legally separated froma strong regulatory mechanism. In the long run, how- government as a means of ensuring that utility ratesever, a stable environment capable of withstanding are adequate and are reinvested to maintain high-shifts in government requires just such a regulatory quality service. Incorporation is especially important ifmechanism. Otherwise there is the danger that massive the governing body of such a utility is (as is typicallyshifts in policy will occur with every election or change the case) dominated by persons representing politically

Regulatory Policy for Telecommunications 33

powerful interests whose livelihood depends upon the relatively predictable increases in revenues when ex-best possible utility service. A strong governing body penses increase; (b) legally binding authority to man-can resist or minimize pressure for radical shifts in pol- date increases; and (c) complete or partial isolation oficy or decisions that would damage the technical base the body ordering increased revenues from the local po-of the utility. litical and economic pressures that tend to resist high

Separation of a publicly owned utility from govern- charges.ment is the best and possibly the only means to prevent It is doubtful that any lender would be allowed, orutility revenue from being diverted into an overall gov- would even desire, to set the actual utility rates oremment budget. Political competition for scarce capi- charges to customers. Some techniques, however,tal can be so intense that a utility may be allowed to could ensure adequate utility rates despite inflation anduse only a fraction of the money collected from custom- technical progress while respecting the sovereignty ofers. Legal separation from government makes it likely, the borrowing nation.though not certain, that revenue collected for utility It is technically and legally feasible to adjust utilityservice (over and above normal and proper tax liabili- revenues over a significant period of time by linkingties) will be spent to maintain or expand service. these revenues to an appropriate index or weighted

Lenders have recognized that publicly owned utili- combination of indexes. Such a formula could be in-ties, whether or not they are separated from govern- cluded as a condition in any lending agreement subjectment, are subject to enormous public pressure to keep to periodic reevaluation and renegotiation. Similar sys-charges low. Government and private lenders to munic- tems have been in place and working well in parts ofipal or cooperative utilities in the United States have the United States for the last six to eight years. Moreused their leverage, often with the tacit approval of the recently a crude version has been applied to a portionborrower, to include conditions in loan agreements of British Telecom's earnings. Such systems, however,that tend to force the utility to collect adequate cannot and should not be expected to operate automati-charges. Loan agreements between American electric cally over long periods of time. Costs for the operatingcooperatives or small rural telephone companies and entities will diverge from any index and will cause ei-federal lenders usually require minimum levels of in- ther inadequate revenue or excessive profits-both ofterest coverage and mutually agreed-upon depreciation which are dangerous and undesirable. To be successfulschedules. These requirements together with some an indexing method must be both deliberately simpleguarantee against local inflation often inspire hope that and carefully reviewed and adjusted every three or foura utility will charge and retain adequate revenues, but years.this expectation has proven unrealistic. Similar provi- The Michigan system, which has been in place forsions are typical in loans by major international institu- eight years, illustrates the mechanics of a workable in-tions to telecommunications entities in developing dexing system. Studies of the Bell System found thatcountries, even when such institutions are government productivity increased at approximately 4 percent perbodies backed by the full faith and credit of the govern- year. If the consumer price index (cPI), GNP deflator, orment. As the operating entities are increasingly dis- any other measure of the level of inflation affecting atanced from their governments, this form of discipline wide range of goods and services rose by 10 percent inwill grow in importance. a given year, Michigan Bell's rates would automatically

Worldwide inflation and rapid technical progress can increase 6 percent (10 percent increase in cpi minus 4make expensive equipment obsolete and replacement percent productivity gain) for the following year. (Theimpossible even though revenues are perfectly adequate British system employs cPI minus 3 percent.) The Mich-to fund existing depreciation schedules. This phenome- igan Public Service Commission (MPsc) indexation sys-non placed unbearable pressure on U.S. rural electric tem, however, was not designed to operate automati-cooperatives and small rural telephone companies dur- cally over a long period of time. A thorough reviewing the 1960s and 1970s. Although they had loan agree- every three years was mandated to examine every majorment conditions and organizational structures separate item of Michigan Bell expense as well as the appropri-from government, the electric cooperatives and small ateness of the indexing formula itself. In our opinion,telephone companies literally demanded state regula- the British approach does not provide for sufficientlytion of rates. They knew that a regulatory body removed frequent or thorough adjustment. Failure to recalibratefrom local political and economic pressures would rec- and to include enough revenue creates powerful incen-ognize their severe problems and would prescribe large tives and distortions that will prove costly.but necessary rate increases. The system does not work Theoretical economists may say that such formulasperfectly, but it contains three elements necessary to are too simplistic. It is clear, for example, that inflationproduce adequate utility revenue and reinvestment: (a) does not have a significant impact on the cost of embed-

34 i'.,=9.h199, Il', 'id Eric Schneidewind

ded facildes, wo l ich is a major utility expense. By the ample, the national government) and could be ex-sarne ;cxken. Bei. System productivity increases did not panded to include a broader range of rewards (reducedned,cue the cost of a'la Bell expense items. The key point, interest rates or advantageous access to additional capi-lho,eve-, ast hindsight analysis has shown, is that sim- tal for expansion) or penalties (increased interest or re-ph-9: for9ll mgas of Oh.s sort can, if they are regulated and duced access to new capital) that are linked to specific

crc'rnenv reviewed, consistently give results more or standards for quality of service.Iess tb.e sa:ne asi those produced by long, thorough rate-mnikin-g 9processe§ brut at far less cost and with far, less,C 1 ~ ~ but at far less cost and with far less The Second Case: Regulating a Single

mnore eeg.ant and defensible approach would be to Prvately Owned Monopolyb;tak daocm- by category and weight each element ofu9 i N expense (for example, interest costs, Labor, Private ownership of monopoly utilities necessitates a

ecuipment, and maintenance supplies) and to select an strong regulatory role by govemment. Managers of pri-aappron. 'te rdex for use in increasing each item. (Data vately owned utilities are inevitably tempted to use

+eadl.v vi'ajble from U.S. sources would indicate aver- their relative or absolute monopoly position to maxi-age ccst ncreases for commonly used telecommunica- mize profits by increasing charges to unreasonable lev-t''ons iuupiment as well as the productivity increases els or by reducing expenditures for service quality andffirat could be achieved by using such equipment.) Reg- expansion. These profit-maximizing tendencies requirevlator y bodies in the industrialized countries will per- direct government regulation of utility charges andhaps -" Lo moe in this direction, but the increased service quality, modified where possible by the intro-ps ,cisic- cornes at a cost that may be prohibitive in de- duction of some forn of competitive pressure. Also,ve I op 1n, c untes, where statistics are not always reli- some govemment agency must stand ready to remove

al 2 ualified staff are scarce. or reduce the private monopoly franchise if service isIz,n-T lb?. overstressed that any indexing tech- unacceptable or prices unreasonable.

q ues ot se reevaluated periodically. Also, new base Rate regulation, as it is commonly practiced in theU;a O'~ _ale base investments and current expenses United States, involves verification of utility capital in-

nl,US bn) ;audked to check the accuracy of utility rec- vestment and determination of an appropriate returnords; -' t-ha, n egulatory agency does not wish to keep on that investment. The resulting monetary amounta elar&a 7ernranent sta'ff to do this chore, it could con- plus allowable expenses constitutes the utility's revenuetre.ct -hualifed independent accounting firms to do requirement. The required revenue minus current rev-hre wvrjr e-;ver-y three to four years. enue equals the needed rate increase. Application of

this simple rate-making formula often entails a process. -l J2i. g'fe Regulation lasting over a year and involving thousands of hours of

auditing and the talents of attomeys, engineers, and ac--a c regulation is important but difficult countants too numerous to mention. It is often said

to e-*ure .here there is no real competition for a pub- that the rooms where rate cases are heard in publicfichy cvmeCi uiqi. Who is responsible for enforcement utility commissions should have signs saying "Abandon-whe a .gove.rment or a govemment-owned agency is hope all ye who enter here."the iAdflii-y 1 Outside engineering firrns or consulting The traditional utility rate case is really a cost-plusgr'_',s canA. easly check service quality, but they have form of contract in which legitimate expenditures onnapo-w~~,. >- O -fev.ard good service or to impose sanctiions capital expense items are verified and paid togethervvz/n Ie- tC zov D-4t with a margin of profit. It is necessary to verify periodi-

m theflnal analysis, only the lender or the utility's cally (once every three to five years) that facilities listedgorSenrng board can effectively extract high- on the books correspond to the capital investment

qu i*3ty sen.il-ce from a publicly owned utility. Comnner- being claimed, that they are in reasonable condition,ei-al eniders wEth a myopic view are typically interested and that service quality meets required standards. Thisom~ in .:he u ility's ability to service its loan-that is, task is not particularly burdensome. Adjustment of rev-dn its r- *-WX,nues.According to one longer-term view, sta- enues to offset inflation or technical obsolescence, how-ality oil revenues, ownership, and political treatment ever, can deteriorate into a highly subjective and time-

require ;t- a the utility provide its customers and the consuming process. Annual revenue adjustment by thenhti9n.07ii satisfactory-and steadily improving- indexing methods discussed above in reference to pub-ser vie -enders such as the World Bank therefore olFten licly owned utilities, coupled with rigorous enforce-?MH SUVI -ce standards to their loan. The same ment of service quality standards, can restrict price in-

e S uAd be employed by other lenders (for ex- creases to reasonable levels while preventing the

Regulatory Policy for Telecommunications 35

privately owned utility from maximizing profit by re- densely populated areas or industrial facilities. Theducing maintenance expense. technical capacity of a government network can be lim-

As with publicly owned monopolies, it would be use- ited to voice and basic forms of data transmission andful for a lender or govemment regulator to design fi- need not include the data or video transmission capa-nancial incentives and disincentives linked to quality of bility required by relatively few business customers.service. A govemment regulatory agency is usually the There are equally compelling reasons for the exis-best means of enforcing service quality standards and tence of privately owned telecommunications facilitiesrate restraint on private monopolies. In theory, the or networks of restricted scope. A limited number ofpower of govemment should effectively balance the highly sophisticated, large-volume enterprises can useeconomic and political power of a private monopoly the latest communications technology. These enter-utility. Government regulators, however, can become prises usually have the financial and political strengthexcessively involved in the problems of the regulated to demand frequent replacement of dedicated transmis-industry. The worst results can be avoided if a lending sion equipment and equipment on customers' premisesinstitution insists upon internationally recognized as technology advances. Historically, large enterprisesservice quality, requires that record-keeping standards have been able to obtain a wide variety of services, in-be upheld, and demands the right to verify compliance cluding telecommunications, at or near cost.with these standards. In view of these facts, it makes sense for a developing

country to evolve toward a telecommunications sector

The Third Case: Regulating Several Public that includes both a publicly owned, pervasive networkand Private Entities providing basic services and one or more privatelyowned installations or restricted networks that provide

highly sophisticated facilities and transmission to high-Even where no competition currently exists, the mere volume business customers. A telecommunications sys-possibility of alternative sources in the utility field tem combining public and private facilities can realizethreatens existing operators and is thus an incentive the following benefits:for superior performance. Increasingly, in developingcountries as well as in industrialized countries, pub- * Capital costs of the public system would be re-licly owned utilities are aware that competition or duced by avoiding widespread installation of tech-privatization (whether overt or covert) will be consid- nology that is used by only a few customers; theyered if service is poor or prices unreasonable. Similarly, would also be reduced by using switching andprivate utilities are often threatened with public take- transmission capacity made available when busi-over when customers become unhappy. The threat of ness customers leave the public network to bechanged ownership is invaluable as discipline, but it served privately.cannot be credible unless there are visible examples of * Access to state-of-the-art communications facili-altematives, for example, of public and private types of ties provided by responsive profit-oriented operat-ownership. A model of coexisting public and private en- ing entities at free market prices offers a strongtities as discussed below would appear to create signifi- incentive for foreign investment in new busi-cant incentives for efficiency and good service in both nesses or industries.publicly owned and privately owned utilities. * The risks of premature obsolescence or price cut-

A combination of publicly owned and privately owned ting in the equipment or transmission facilitiesoperating entities appears ultimately the most likely provided to high-volume customers are bome bytelecommunications system and, if it is regulated prop- private capital.erly (an important caveat), the most beneficial one for * Rapid and unpredictable fluctuations in the de-most large- and middle-income developing countries. mand for sophisticated high-volume telecommu-

There are important legitimate reasons for public nications services need not be anticipated in na-ownership of a switched network in a developing coun- tional budget planning.try setting. Traditional govemment priorities such assecurity, emergency preparedness, and economic devel- The entry of private telecommunications operatorsopment will have a dominant influence on the location into a market may cause economic harm to an existingand capacity of a telecommunications system. These dominant public carrier. The private operator may tar-priorities can dictate a system radically different from get only the most profitable portions of the market ora network designed to maximize profit. The scope of a use predatory pricing and cross-subsidization to gaingovemment network must encompass every population business without really offering lower costs overall. Thecenter and geographic area of a country, not just reverse situation-the use of profits from one part of

36 7Tmothy E. Nulty and Eric Schneidewmzd

the telecommunications market to subsidize expansion complete toll calls. Customers with the potential toor service in another-is a legitimate tool of public pol- feed traffic into the local exchange could then beicy. Obviously it must be limited to clearly defined goals charged a rate for local service that would generateand situations if excessive uneconomic behavior is to enough revenue to offset the impact of this form ofbe avoided. Wherever govemment decides, as a matter competition.of policy, to pursue or permit such cross-subsidization, Finally, in developing countries where a high levelhowever, some form of regulation is necessary to pre- of unsatisfied public demand for telecommunicationsvent the system from being undermined by cream service exists and capital is not available to connectskimming. The numerous mechanisms available for the these customers to the public network, any switchingpurpose range from outright prohibition (which is diffi- or transmission capacity freed by the departure of acult and has its own problems) to speciai surcharges large customer from the public network could be ab-for cream skimmers comparable to the cost of cross- sorbed by new customers. There would then be no needsubsidy. The revenue from such surcharges then goes to charge a compensating fee for stranded transmissionfor the same purpose or for the telecommunications or switching capacity. In some cases, however, the cus-entity's cross-subsidy. (This arrangement has the ad- tomers leaving the public network can represent suchvantage of creating a level playing field without immu- a large proportion of usage that unsatisfied demandnizing the operating entity from competitive pressure.) cannot quickly absorb stranded capacity. In these cases,

The comerstone of government regulation of a a temporary surcharge might be assessed to pay costsmixed public-private network should be free entry into of stranded capacity until the equipment is fully depre-the communications market as long as the new private ciated or until usage increases to absorb stranded ca-operator or its customers agree to comply with mea- pacity.sures designed to eliminate negative impacts on thepublicly owned network. Although a properly regulated Rate and Tariff Regulationmixed regime is the best kind possible under currentcircumstances, in our view, a caveat is critical: without Rate and tariff regulation of private operating entitiesfair and effective regulation, a mixed regime could could be avoided entirely where a publicly owned entitybe worse than a single monopoly, especially a public offered feasible altemative service. Under a policy ofmonopoly. free entry, a customer who was dissatisfied with the

rates charged by a private operator could use the lessFranchuse Regulation sophisticated service offered by the publicly owned en-

tity or solicit bids from new private carriers. In effect,The key to a successful mixed regime is franchise regu- competition or the threat of competition would restrainlation that specifies a number of frontiers around the private carriers from charging an excessive rate andfranchise in addition to the obvious geographical would ensure good service.boundary. If a customer already on a franchisee's net-work wanted to leave (to join a competitor or to set up Enforcement of Quality Standardshis own system), for instance, he should be required tobuy or continue to rent for a time any customer prem- Government enforcement of standards in three specificises equipment, inside wiring, and outside plant dedi- areas would be necessary in a telecommunications sys-cated to that customer's use. This policy would permit tem that combined public and private operators. Trans-public investment to be recouped and would prolvide mission fiequencies would have to be allocated amongthe customer with backup service. Also, it must be as- competing public and private users. Technical stan-sumed that private automatic branch exchanges (PABxs) dards (such as those of the Intemational Telegraph andlinked to a private national or intemational transmis- Telephone Consultative Committee, ccirr) relating tosion system will to some extent connect traffic in the customer equipment transmission facilities, number-publicly owned local exchange. One or more large cus- ing plans, software protocols, and so forth for publictomers can thereby be transformed into a transmission and private carriers must be compatible. (It should benetwork that competes with the public network for na- assumed that these systems will be linked and must op-tional or intemational traffic. In place of frequent in- erate at an acceptable level of quality when calls usespection of the capabilities and use of each private in- more than one carrier.) Government allocation to pri-stallation, tariffs for access to public local exchanges vate entities of transmission frequencies, and inspec-can be developed which presuppose that the customer tion of customer equipment for compatibility, provideis using the local exchange both for local calls and to a legitimate and economical opportunity to require

Regulatory Policy for Telecommunications 37

buyback of publicly owned customer equipment and as- cuses on frequency allocation, compatibility of equip-sessment of charges for private facilities likely to chan- ment protocols and technical parameters, equipmentnel traffic to the public network. service parameters (such as percentage of calls con-

nected), and compatibility of numbering plans. VariousDivision of Revenues national and international standards exist for customer

and transmission equipment, but trained professionalsIt is likely though not certain that some process for a are necessary to apply these standards, particularlydivision of revenues would be required in a telecommu- where the network has more than one carrier. Engi-nications system combining public and private entities. neers must also check the performance of equipmentSome private operators would (if they could) choose to ensure that calls are completed and audible.to establish links directly to international satellites The division-of-revenues process involves allocatingand avoid any connection with a publicly owned opera- the costs of jointly used facilities to various kinds oftor. In many cases, some reliance on publicly owned traffic (toll, local, and so on) and then among the enti-switches or transmission would require the public and ties serving that traffic so that each pays its fair shareprivate entities to form an economic relationship. Con- of costs and receives its fair share of revenues for callstractual negotiations are commonly used to resolve any using more than one entity. This function requires aissues, but a dominant or bottleneck entity may exer- detailed knowledge of the technical capacities and char-cise undue bargaining power. Government policies per- acteristics of a wide variety of telecommunicationsmitting bypass in certain circumstances (for example, equipment.upon payment of a surcharge to contribute to national Accounting or auditing. Accountants or auditors arenetwork development) of any bottleneck would in effect necessary to verify revenues and expenses for the rate-set an upper boundary on the fee that could be charged setting process. The rates of a privately owned monop-to private operators for use of a bottleneck facility and oly entity must be restrained or regulated in some way.could eliminate the need for direct govemment in- Although there are simplified ways of setting or adjust-volvement in the division-of-revenues process. ing the telephone rates charged by a private monopoly,

all rate-setting methods require the periodic verifica-

Organizational Structure and Staffing tion of assets, revenues, and expenses.of a Regulatory Agency Tariff analysts. Tariff analysts develop or check tele-phone rates to ensure that a required gross revenue will

be collected by a certain set of tariffs or vice versa. EvenFigure 4-1 shows a hypothetical communications regu- publicly owned monopoly utilities will require tariff an-latory agency. As mentioned earlier, the responsibilities alysts to deal effectively with international carriers andof U.S. state regulatory agencies are similar to those allocate system revenue requirements among differentthat might seem desirable to a typical developing coun- types of customers.try (except that the latter would face a few more respon- Attorneys. Attorneys may be necessary to interpret orsibilities, for example, relating to international services draft contracts where public and private operating enti-and frequency allocations). Furthermore, many U.S. ties must interconnect. Where a private entity is sub-states regulate systems of less than a million lines and ject to regulation, the regulatory agency head may re-face problems with remote high-cost rural populations quire legal advice to apply disciplinary sanctions orthat are similar to those in developing countries. decide disputes between operators and their customers.

A full-service telecommunications regulatory agency Agency head. A person or collegial body must super-must include at least five sections: engineering, ac- vise the employees of the regulatory agency and makecounting or auditing, tariff analysis, legal analysis, and final decisions regarding the applications of regulatorya policymaking head or collegial body that may or may policy to public or private operators. Sometimes the su-not supervise the other four components. Obviously the pervisory role is vested in a chief of staff who reportsprecise forn that these take and their relative size can to the person or collegial body resolving disputes or ap-differ greatly from country to country, depending on plying policy.circumstances and on the goals being sought. Staffing and equipment required. The staffing re-

Engineering. A team of telecommunications engi- quirements shown in Figure 4-1 are similar to thoseneers is necessary to check matters relating to quality used by the MPSc to regulate forty-five operating entitiesof service, franchise violations, and some aspects of the with a total of 3.5 million subscriber lines and annualprocess by which revenues are divided. gross revenues of between $2.5 billion and $3.0 billion.

Concern with ensuring quality of service usually fo- The MPSC has a staff of approximately thirty persons or

Figure 4-1. Organization of a Communications Regulatory Agency

X A~~~~~Director ofA Director of Policy and Director of Director of

|:t Opentions External Sup~~~~~~~~~~~~~~~~~~~ptortJdiir

Afars

5 Technical standards 1 Intemational agencies I Personnel 2 Clerks10 Enforcement I Central and local govemments 2 Public documents 2 Judges6 Licensing 1 INTELSAT 5 General support 4 staff2 Tariffs 2 Policy 1 Formal complaints and1 Legal I Education and research document coordinationI Auditing 1 Legal 1 Annual report, monitoring,

25 staff 7 staff _ fees, and collections10 staff

Note: In developing countries judicial staff may not be necessary at the initial stage; their inclusion depends on the modality and level of disputeresolution. With three commissioners, three directors, an optional chief of staff, and forty-two staff members, the total personnel shown inthis example is forty-nine, excluding secretarial staff and the optional judicial staff. Spectrum management and type approval, if part of theagency's functions, would require additional resources.

Regyuatory PoRt for Tekcrmnmwkaons 39

their equivalent (some individuals, such as attomeys or location. Considering the scarcity and cost of qualifiedeconomists, work on problems related to energy and telecommunications engineers, this is one area in theteleconmnunications utilities and are based outside the economy of a developing country where automation iscommnunications division). Smaller systems need fewer well justified.people. Perhaps one-sixth of the MPSC (five or six per- With accurate test data, the regulator can require thesons), however, may be regarded as an irreducible min- operating entities to meet an acceptable level of per-imum; with a smaller staff it would be difficult to regu- formance in return for favorable govemment action onlate at all, regardless of the size of the system. matters of interest to the operator, such as rate in-

Some caveats are in order before these numbers can creases, franchise enlargement, and frequency alloca-be useful. First, the books and records of the regulated tion. This approach minimizes the amount of staff re-telephone companies in Michigan are in good order quired and can be applied to virtually any dispute withthanks to long-standing pressures from a variety of reg- a regulated utility.ulatory and financial institutions. This might not be the Fourth, the level of regulatory resources can be con-case in some countries. Second, state regulators typi- tained if the regulator adopts a lirnited set of reasonablecally inspect and monitor the quality of local plants if performance standards and restricts the agency role toservice deteriorates. Substandard local plants would ensuring strict compliance rather than showing thegreatly increase the need for regulatory engineers. regulated utility how to solve a problem. It is often a

Third, the importance of easy access to high-quality mistake for a regulator to become involved in a prob-data must be noted. Remote testing devices costing no lem beyond proving that service is inadequate and de-more than US$100,000 permit the three engineers of manding correction. The danger is that the regulatedthe MPSC to test millions of subscriber lines over a large utilities will involve the regulators in developing solu-geographic territory in virtualy any weather condition. tions or obtaining endorsements for specific courses ofNew telecommunications systems can be constructed action. If the solutions do not work, the regulators be-so that remote test equipment is built in or can easily come reluctant to criticize what they regard as theirbe attached to key points and operated from a central own ideas.

Part II

The Experience ofIndustrial Countries

5

Options and Developments in theTelecommunications Sector

Robert Bruce

National telecommunications policies seldom evolve particular outcomes. In short, by sifting the informa-apart from the panoply of economic, technological, and tion on changes in policy beyond national borders, apolitical pressures in the international arena. National nation-whether fully or less industrialized-can iden-policies affect external forces and vice versa: when one tify options and determine the respective advantages ofcountry modifies its policies on industry structure or those options.regulatory institutions, the changes almost inevitably It cannot be sufficiently stressed, however, that newripple outward into the intemational environment. Na- national policies in any one country will be developedtional shifts in policy affect the deliberations and poli- as a unique response to that country's economic, social,cies of neighboring countries or other countries con- political, and institutional environment. New policiesfronting the same set of issues. will have to blend new and more traditional ideas about

Present discussions on reviewing and restructuring the roles of the public and private sectors and about thethe telecommunications sector throughout the indus- appropriate place of law and regulation in structuringtrialized world are therefore being profoundly influ- markets. At the same time, the extent to which re-enced by recent developments in Japan, the United sources are constrained, and pragmatic political con-Kingdom, the United States, and Europe. The national siderations, may be overriding factors that must bechanges are producing intemational economic or com- taken into account.petitive pressures. This chapter catalogues some of the forces that are

The wide range of external factors has a subtle im- requiring the telecommunications sectors of the indus-pact on policymakers; outcomes in one country may trialized world to change. These factors and related de-serve as policy paradigms for emulation or rejection by velopments may have some substantial relevance forboth the industrialized and the less industrialized countries elsewhere that are taking a new look at re-countries. They might tailor models developed abroad structuring or managing the sector. The chapter is in-to the specific needs of their national circumstance. Na- tended as a checklist of some of the more important is-tional deliberations-and their results-will thus affect sues confronting countries. In it I survey, but do notneighboring nations, regional arrangements, and deci- comprehensively assess, some of the structural or regu-sionmakers around the world. latory options being explored or implemented in the in-

The underlying premise of this chapter is that inter- dustrialized world. In conclusion I consider the rele-national developments constitute a context for national vance of some of these options for less industrializeddiscussions of policy but that they do not determine countries.

Note: The main purpose of this chapter is to present the general framework of current regulatory policy. It presents an accurateaccount of developments at the time of writing (November 1987). As indicated here, the situation is very dynamic. Countriessuch as France and Germany are continuing to refine their approach to the provision of value-added services and the liberalizationof the provision of telecommunication services overall. Australia issued a policy review in May 1988. There have been otherdevelopments in other countries.

43 1

44 Robert Bruce

External Factors That Affect Telecom's decision to stop applying the principle ofNational Policy Options volume-sensitive pricing inherent in the D.6 Recom-

mendation of the International Telegraph and Tele-Pressure for Cost-Based Pncing Schemes phone Consultative Committee (CCITT) will reverberate

throughout Europe. The result is likely to be a chillingIn the industrialized world, national pricing schemes of the enthusiasm of other European administrationsfor telecommunications services have traditionally for usage-sensitive tariffs lest international traffic be di-been shaped by pressures to develop or maintain uni- verted to switching centers where flat rates for leasedversal service. Averaged pricing, cross-subsidization, line are available.and pricing divorced from cost are some of the hall- As national pricing structures are being realigned, somarks of these national rate structures. Many of the too are intemational tariffs; the reduction in inter-changes in national telecommunications policies, how- national rates is eroding an established and highlyever, are now having a major effect on these pricing ar- profitable business for many administrations. Inrangements and are essentially moving prices closer to part the intemational realignment reflects the com-costs. petitive pressures within Europe that are forcing

In the United States a principal consequence of de- interexchange rates toward cost. In addition, however,regulation over the past decade and a half, and of the a set of pressures is emanating from the United States:divestiture of the American Telephone and Telegraph competition between AT&T and its competitors for in-Co. (AT&T), has been intense pressure to price telecom- temational telephone traffic, AT&T's efforts to free itselfmunications services in close relation to their costs. of requirements that restrict its ability to select least-Interexchange competition between AT&T and new car- cost routing, intensified competition between fiberriers has eroded long-established cross-subsidies be- optic cables and INTELSAT, and the potential competi-tween the rates for long-distance and local services; tion offered by private satellites.consequently, the pricing of interexchange services has As intemational tariffs drop, administrations mustdropped dramatically. look elsewhere for ways of maintaining revenues. The

The effects of such realignments in pricing have not economic pressure is rising at a time when the tradi-been confined within the United States. Movement to- tional post, telephone, and telegraph companies (PTTs)ward cost-based pricing has created pressure, for exam- are facing significant costs of investments in new inter-ple, in Canada for a "rate-rebalancing" process. Al- national facilities and domestic digital networks. It isthough no facilities-based competition in public difficult, however, to replace revenues lost from reduc-switched services exists in Canada, rate structures are tions in interexchange or intemational tariffs with in-undergoing examination in part because of fear that creased revenues from local services without politicalusers will bypass Canadian carriers and facilities by di- friction.verting their trans-Canada traffic through the United Administrations must therefore develop a strategyStates to take advantage of lower long-distance rates. for generating new revenues. One option might be to

The relationship between policies in the United shift the risk of developing markets to new entities thatStates and the impact of these policies elsewhere in might be better able to raise capital. If this strategyNorth America illustrates the more general point that were to prove successful, PTrs might have new servicesthe rate changes resulting from competitive entry can and new providers that could increa-e the use of net-exert a gravitational pull on pricing policies in other work facilities, thereby supplementing the revenuescountries. In Europe, liberalization in the United King- flowing from them. In summary, traditional servicedom, with the authorization of Mercury as a competitor providers, in an effort to respond to global pressure forto British Telecom, has reduced interexchange prices cost-based pricing, are finding it an economic necessityand has contributed to adjustments upward in charges to promote the adoption of more liberalized policies forfor local services. Despite some resistance elsewhere to network usage.open entry, the British policy has no doubt considera-bly influenced pricing decisions on the Continent. Intensified International RivalryCompetition in the United Kingdom, it would seem,has affected even the decisions of the Direction Gene- In the evolving intemational environment, the rela-rale des Telecommunications (DGT, now France Tele- tionships among PTTs are showing increasing rivalry.com), which has reduced long-distance charges and In Europe, Southeast Asia, Australia, and other parts ofshortened the local-call charge period. the globe, administrations are striving to become hubs

Changes in national policies regarding international for intemational traffic. This effort is tied not only toservices can have a similar spillover effect. British a concern with bolstering revenue flows from interna-

Options and Developments in the Telecommunications Sector 45

tional traffic in light of pressure to adopt cost-based A former executive of the Nippon Telegraph aad Tele-pricing principles but also to a recognition that multi- phone Corporation (Nrr), who is now with one of itsnational businesses need competitive and flexible tele- competitors, once asserted that the objective of Japa-communications services. nese policy was to lower the price of communications

Within Europe, for example, policymakers in the to stimulate the various sectors of the national econ-Netherlands tend to follow the liberalization in the omy that depend on telecommunications. This view ofUnited Kingdom step by step. Their intent is to have telecommunications, as a vital component of nationalAmsterdam compete fully with London as a point of ac- economic policy, is echoed by some Dutch policymak-cess to Europe for international networks. Conversely, ers: the goal of the Dutch m7 is to adopt a policy towardGerman policymakers have been hindered by a strong leased lines that would stimulate the developmentnational consensus in support of pricing principles de- of electronic publishing and other information ortermined by social and political needs and by a rather telecommunications-based services.centralized mechanism for setting prices; in the view Communications capabilities and services are nowof many observers, overly rigid policies have caused the seen as electronic commo)dities essential to the de-migration of multinational customers out of Germany. velopment and expansion of a service-based economy.

Throughout the world, policymakers are keeping a Increasingly, therefore, policymakers are not simplykeen and watchful eye on the actions of their neigh- focusing on the status of the service provider butbors. Although the Commission of the European are looking to telecommunications as an engine ofCommunities is endeavoring to adopt one common national economic growth. This view seems to be gain-Europe-wide approach to telecommunications policy, ing currency among policymakers in some of the newlyfor example, it seems unlikely to be able to curb industrialized countries as well as in developingintraregional rivalries among members of the Euro- countries.pean Economic Community. Indeed, policymakers inthe United Kingdom and the Federal Republic of Ger- Pressures from Multinational Usersmany may well agree that any overall European frame- and the Development of New Serviceswork should allow for diverse and divergent policies.

Competitive relationships may in fact intensify. In Part of the impetus for having national economic poli-coming years, national satellite services will be mar- cies take telecommunications into account comes fromketed on a transborder basis, as of course they already the fact that multinational users are increasingly usingare in North America, Europe, and the South Pacific. telecommunications and information processing facili-Regional satellite systems are supplying services that in ties to develop new electronic markets. New marketssome sense bear a competitive relationship to services for commodities, foreign exchange, and securities de-provided by national administrations. pend wholly on telecommunications. Communications

services are vital links between manufacturers, whole-Importance of National Economic Policies salers, and retailers. Telecommunications networks are

the ganglia for the flow of transactions within a societyThe global economy is increasingly characterized by in- where bits of data replace tangible goods.tense competition for new markets and is being shaped The structuring of these electronic ties and marketsby the efforts of nations to improve their balance of cannot easily be accomplished without disrupting thetrade. Economic and political pressures to enhance a traditional role of the entities providing telecommuni-country's trade posture underlie changes in national cations services. Those offering new electronic serviceseconomic policies. As a core sector of the national have an interest in retaining control over the design,economy, telecommunications, and therefore telecom- protocols, and operational aspects of new electronic fi-munications policy, are subject to economic policies nancial networks. Consequently, telecommunicationsdeveloped in light of far-reaching global strategies. standards may conflict with the standards deemed es-

In the United Kingdom, for example, a liberalized tele- sential by another industry.communications regime is intended to support and Businesses in sectors other than telecommunica-augment London's role as a global financial center. tions but dependent upon it may resist subjectingAustralia's intemational telecommunications carrier, electronic banking or financial services, for example,the Overseas Telecommunications Commission (oTc), to telecommunications regulation. Nationally anddescribes itself as much like an intemational trading intemationally, the emergence of electronic marketscompany; its goal is to route through Australia interna- will create pressure for flexibility in the application oftional traffic destined for Southeast Asia, to draw finan- telecommunications regulations that might otherwisecial services businesses to Australia. restrict the interconnection of different private line

46 Robert Bruce

networks with each other and with the public switched The option has been attractive to national policymak-network. ers who shun the notion of spending resources on du-

It is therefore increasingly likely that overlapping plicative networks but favor giving more leeway in thesectors will clash. Users not in the telecommunications use of those network facilities. In Europe, for example,sector itself will try to confine the scope of telecommu- the size of a major national European market is be-nications regulation, at both the national and the inter- lieved essentially to be too small to allow open entrynational levels, to prevent their own activities from into facilities; Europeans often note that a Prr servesbeing regulated as telecommunications. a market roughly equivalent to that served by one of

The blurring of distinctions'between sectors will in- the divested operating companies in the United Statestroduce new players into reEulatory debates. Large and that the operating companies face limited competi-multinational corporations based in the United States tion in providing local service. Similar concems areare prominently represented in organizations of users raised in other national settings with markets substan-such as the International Telecommunications Users tially smaller than that of the United States.Group (INTUG). They are being joined by their European As attractive as the Japanese distinction might beand Japanese counterparts, many of whom rely on tele- theoretically, it has not been easy to implement in prac-communications to secure a competitive position inter- tice. The Japanese themselves, for example, face the dif-nationally. ficult question of how to ensure fair competition in

Because telecommunications is vitally important to markets for new information services between a domi-a broad spectrum of industries, the multinational users nant Type I entity such as Nff and a less-regulated Typeare now asking telecommunications providers and reg- II entity. If a Type I entity were permitted to establishulators to provide new facilities, offer new services, an unregulated Type II subsidiary for all its services, thelower prices, and enhance flexibility in the use of those regulatory scheme of the 1985 Telecommunicationsfacilities. Such pressure is not, however, being brought Business Law would be circumvented. Thus in lieu ofto bear on national policymakers alone. Intemationally the apparently sharp distinction between facilities andas well, users are demanding an array of services. Some services, policymakers might once again have to defineof these will be developed under the auspices of norms a set of services that a Type I entity can offer on a lessresulting from the ccITT process. Additional new inter- regulated basis.national services will grow out of arrangements engen- The seemingly clear differentiation between the pro-dered by multilateral and bilateral negotiations over vider of facilities and that of services has also proventrade in services. difficult to apply in the international environment. In

Japan and elsewhere, policymakers must identify theNdifferences between an intemational carrier such asNational Polncy Options: Kokusai Denshin Denwa (KDD) and Type II providers of

international services. The question of the proper regu-latory status of international value-added network

In response to the extemal and national pressures de- (ivAN) providers, for example, is not resolved by thescribed above, several countries are actively reviewing distinction between Type I and Type II.telecommunications policies and are exploring or im- How, then, in practice, are policymakers to distin-plementing a range of options. The new policies are in- guish facilities from services? I will return to this diffi-tended to adjust the national telecommunications sec- cult proposition shortly.tor to the reality of flux and change in the internationaltelecommunications arena. A variety of options have Facilities-Based Competifionbeen considered in discussions around the world.

Competition in facilities, where it has emerged, hasThe Distinction between Facilities and Services helped to prod the dominant carrier into being more

responsive to users' needs. At the same time, however,In Japan, policymakers have focused on the distinction as the dominant carrier responds to competition, pres-between underlying network facilities, which are desig- sure is created to adjust rate structures. The presencenated as Type I, and the services that use those faciliities, of a competitive alternative may therefore promote ratewhich are provided by Type II entities (see Chapters 7 realignment and a more rapid adjustment of the poli-and 8). This distinction is considered to be one way of cies of a dominant carrier to the new environment.liberalizing the use of network facilities to develop new Mindful of these effects, and motivated by a prefer-services while maintaining a firm hand on entry into ence for service-based competition rather than facil-the facilities market itself. ities-based competition, few countries other than the

Optims and Developmnents in the Telecommunications Sector 47

United States have removed restrictions on the compet- thorized contingent on economic factors in the Frenchitive provision of interexchange or local facilities. Un- market.limited entry into facilities, however, is not the sole In both Canada and Australia, the dominant carriers,means of approaching the is ue of whether facilities- Telecom Canada and Telecom Australia, also face somebased competition should be |ncouraged. limited facilities-based competition. Canadian Na-

The Japanese have not restricted the entry of the tional/Canadian Pacific Telecommunications (CNCP) canType 1, facilities-based entities. Several are now compet- offer private line services but not interexchange publicing, or are about to do so, with NTT over the Tokyo- switched voice services. TELESAT Canada can directlyOsaka route; all the terrestrial applicants were approved offer customers only certain private line services.by the Ministry of Posts and Telecommunications (MPT), In Australia, AUSSAT can offer services for broadcast-and only one of the three satellite-based applications ers and leased lines to corporate or other private linewas not approved. A new factor on the Japanese tele- networks, potentially including those operated by onecommunications scene is the presence of a financially or more of the state govemments. The presence of astrong competitor in the form of the Japanese electric facilities-based carrier potentially capable of servingpower companies, which have plenty of cash and the business customers has tended to spur the dominantimplicit regulatory backing of the Ministry of Interna- service provider to be more attentive to the needs oftional Trade and Industry. large users. The Australians are also initiating a far-

Competition in Japan is hardly unrestricted, how- reaching policy review into the structure of the tele-ever. The MPT has been wary about unleashing unre- communications sector; the likely outcome is some lib-stricted price competition among the new competitors. eralization of services, though it is not clear thatThey are therefore required to set prices as an alterna- further facilities-based competition will be authorized.tive to NT, with the result that, in structuring rates, In summary, policymakers have available an array ofthey are almost forced to act in concert with one other. options for allowing facilities-based competition. TheyBy limiting price competition Japan hopes to assist the can limit the number of entrants. They can closelynew entities in establishing themselves as competitors scrutinize the scope of price competition. They can re-to the financially powerful NTr. In the absence of a for- strict the scope of services offered by the traditional andmal regulatory scheme for approving rates, the MPT has new competitors and can set the terms by which suchrestrained NTT's response to the prices set by its com- services are to be offered.petitors. Intemationally, moreover, the MPT was quitecautious about sanctioning more than one competitor Definmg the Scope of Serice-Based Competitionto KDD; at present, however, there are two applicantsfor approval. In liberalizing the provision of services, policymakers

The option selected by the British is one of duopo- are faced with several options. Worldwide, nations havelistic competition in facilities; Britain has authorized both explored and adopted a variety of different ap-just one competitor to British Telecom (BT). Mercury, proaches toward value-added, or enhanced, services.a subsidiary of Cable and Wireless, has prodded British These options rely on definitions or schemes for regula-Telecom into proposing significant reductions in rates. tory classification of services as a way of specifying theThese proposals require the new Office of Telecommu- services to be permitted, the terms, and the entities bynications (OFTEL) to address the allegations that the re- which they are to be offered.ductions are predatory. Mercury's presence has also had Some of these definitions are based on technologicalan impact on intemational services; it has no doubt in- distinctions. Others seek to draw lines of demarcationhibited British Telecom from concurring in the propo- based on market criteria. In France, for example, bothsals of some European Prrs that volume-sensitive rates approaches are being explored in the recent draft of ashould be imposed on leased lines. decree on value-added services; the decree establishes

The draft telecommunications law currently being a regulatory line of demarcation based on the propor-circulated in France also implies that the entire sector tion of data processing and transmission activitieswill be opened to competition. Although action on the involved in providing the service and also sets a thres-law is not likely until after the 1988 presidential elec- hold for classification of services based on the aggre-tions, the option of some facilities-based competition gate capacity of the various terminals that access thesimilar to that in the British model remains a possibil- service.ity. The French also distinguish between certain ser- Many officials charged with making policy reject thevices dl4mentaires and services that are libre; the for- viability and challenge the longevity of any definitionalmer, which might be considered akin to basic services distinction. Although every definitional approach isin the U.S. scheme, will, if the law is enacted, be au- conceded to have its flaws, some distinction, however

48 Robert Bruce

imperfect, is usually necessary to make the transition across-the-board volume-sensitive pricing for all value-from monopoly services to competition. added services using leased lines represents a policy

The Japanese tried to avoid what they perceived as that diverges sharply from that of the British and theflaws in the technologically based efforts in the UJnited French, who have already initiated significant rate re-States and Canada to distinguish between basic and structuring. Moreover, although the German policy hasenhanced services. Yet as noted above, the Japanese the obvious attraction of seeming to avoid definitionaldistinction between facilities and services has its own distinctions, it may in the long run discourage the im-problems in addressing the questions of how to regu- plementation of new value-added services. It may be alate the value-added services offered by Nrf and how to decidedly second-best altemative to facing head-ontreat intemational services. some of the political unpleasantness of moving toward

In the United Kingdom policymakers began with the a more cost-based rate structure.view that value-added services could be providecl only The French draft decree classifies networks into twoby means of the public switched network. British lpolicy categories; the classification is based on network size,evolved, however, after the proposal for a joint venture as measured by the aggregate number of extemal ac-between International Business Machines (IBM) and cess points. In this regard, the distinction being madeBritish Telecom had been rejected; value-added services is not unlike the criteria used in early versions of thecould be provided over leased lines. Thereafter, the Japanese scheme (and later abandoned) to distinguishBritish briefly flirted with a new concept of managed between general and special Type 11 entities. In France,data network services that was not fully developed. the factors used in determining size, however, will vary,

Now, however, after a set of govemment proposals depending on whether the service offered is specific-and the recent release of the value-added license, the providing one function for many users, for example,British appear to have settled on an approach quite sim- those engaged in complementary or identical businessilar to that of the Japanese. Essentially, the British have activities-or general.liberalized altogether the use of leased lines except with The existence of a plethora of national options forrespect to the provision of voice services or what is de- implementing service-based competition is evident. Anscribed as simple resale. In certain circumstances, international consensus does, however, seem to beleased circuits can be used for third-party voice ser- emerging. As may be suggested by some of the recentvices; these exceptions, originally included in the U.K. developments in France, the so-called modified Japa-branch license, are now incorporated in the new value- nese approach, which restricts voice resale, appears toadded license. be the approach toward value-added services around

Dutch policymakers have not definitively decided on which policymakers are beginning to coalesce.their approach to value-added services. Nevertheless, itappears likely that they will track the path laid out by Definitions of Value-Added Servicesthe British.

German policymakers, however, believe that it is not Policymakers increasingly face what could be signifi-practical to make any distinction between entities offer- cant problems in the potential overbreadth of the defi-ing value-added services; the Germans are unwilling to nitions of value-added services. Many entities now offerdistinguish pure resale or arbitrage of voice circuits information-based services or transactional capabili-from, for example, specialized vendors of information ties. These services do have some telecommunications-services. The German position is that value-added ser- like capabilities, such as the ability to link customersvices are now flourishing over the public networks; in an electronic market. Nevertheless, since tele-with respect to services using leased lines, their atti- communications is only one of the many compo-tude is that no definitions are necessary as long as tar- nents of these services, should policymakers applyiffing is predicated on volume-sensitive tariffs. Having telecommunications-related regulation of standards,now adopted this rate structure, the Germans hope to rates, and tariffs to them?have removed virtually all incentives for exploiting the In Japan the question of how the definition of value-differential between leased line and public switched added services should apply to new transactional ortariffs. information-based businesses is essentially avoided,

The reluctance of German policymakers to press for largely because so few regulations apply to most Typea cost-based rate structure has provided the underpin- 11 entities. Internationally, however, the issue cannotning for volume-sensitive tariffs. The size of the differ- be sidestepped; the question arises because policymak-ential between public switched and leased line services ers need to decide how many providers of value-addedmay be unique to the German scene and largely reflects and other telecommunications-dependent servicesembedded social and postal subsidies. The adoption of should be permitted to operate beyond Japan's borders.

Options and Developments in the Telecommunications Sector 49

Furthermore, should the new entities be treated as equally fundamental questions of access to underlyingcarriers or as customers? transmission facilities. Attention is increasingly being

In the United Kingdom the problem of how to treat focused on operational issues relating to interfaces,these new entities is only now beginning to surface. network configurations, and the availability of facilities.The regulatory conditions imposed on providers of Such issues are becoming important for structuringvalue-added services under the new license are not on- the value-added services sector and defining the rela-erous; they are, however, not at all appropriate for enti- tionship between the providers of transmission capabil-ties that are engaged in trading securities, banking, or ities and the entities using those capabilities to providethe supply of information-sectors outside telecommu- services to third parties. In short, physical and opera-nications itself. tional factors are becoming every bit as significant as

French policymakers will most probably be con- the problem of drafting and implementing definitions.fronted with the issue because of the interest in differ- Questions of physical access arise with respect toentiating between entities providing services to an both interexchange and local facilities. In the case ofopen group versus a closed one. This distinction is interexchange links, for example, policymakers mustfraught with the usual imprecision of all definitions; in confront the issue of access to leased lines by entitiessome respects, however, it is certainly an interesting providing value-added services. On what terms shouldand innovative approach. Because electronic markets such access be provided, and should leased lines be of-among investment bankers, for example, might be fered on a flat-rate or volume-sensitive basis?viewed as services to a closed group, the French ap- On these issues of the availability, use, and pricingproach might enhance the flexibility to offer what could of leased lines, policymakers have reached differentbroadly be described as electronic transactional ties. conclusions in different countries and at different

Although the proposed delineation in France initially times. As described above, until the rejection of the BT-seems to be of importance in determining when flat IBM proposal, British policymakers had thought thatrates or volume-sensitive tariffs will be applied to leased value-added services should depend exclusively on pub-lines, it may also suggest an emerging policy to encour- lic switched services; in Germany, leased circuits areage the development of value-added services. There is made available but with volume-sensitive tariffs.some ambiguity, for example, as to whether different The implementation of an Integrated Services Digitalentry policies might apply to entities intending to offer Network (IsDN) environment is altering the way inservices on an undifferentiated basis to the general pub- which policymakers are addressing the questions of ac-lic in contrast to those providing transactional services cess to network facilities. Some suggest, for example,to clusters of users linked through established "transac- that there will be no need whatever for separate provid-tional" ties. ers of value-added services once the rrrs have access

The French approach may ultimately contribute to to ISDN facilities. Users are concemed, however, thatthe integration of information processing technologies network integration may eventually reduce or elimi-into existing industry practices, which could, in tum, nate the availability of leased line equivalents. There isenhance the intemational competitiveness of the no inherent reason why, in an ISDN world, a networkFrench service and manufacturing sectors. If the provider cannot make certain full period circuits avail-French approach takes this direction, it may provide able on a flat-rate basis.support for those who believe that minimal telecom- Discussions about the issues of access to the networkmunications regulations should be applied to services also focus on exchange facilities. In the United States,integral to a business activity-such as banking, trad- for example, the question is how to make certain capa-ing, or information processing-that is intrinsically bilities of the local network available to entities provid-something other than the provision of telecommunica- ing services to third parties. In its Computer III deci-tions. Success in the intemational implementation of sion of 1986, the Federal Communications Commissionnew electronic services may well depend on the adop- (Fcc) concluded that dominant carriers would have totion of such a flexible policy by nations around the offer certain basic capabilities of their networks to thirdworld. parties. Initially, under a regulatory and technical con-

cept known as comparably efficient interconnectionAccess to Facilities and Mhe Implications of (CEI), if a provider of network services were to make cer-ISDN and ONA tain network capabilities available to an affiliated entity

offering a service, the same network capabilities wouldAs described above, definitional demarcations can de- have to be made available to unaffiliated entities offer-termine industry structure and can delineate competi- ing similar enhanced services. By 1988, providers oftive relationships. Beyond definitions, however, lie basic services, through development of open network

50 Robert Bruce

architecture (oNA), will be required to afford access spectively. The Dutch, the Indians, and others have fo-to third parties wholly independent of any offering cused on the advantages of a separate corporate entitymade by such providers to entities with which they are that can be used as a vehicle to attract financing andaffiliated. that can hire employees at competitive wages. A sepa-

The provocative regulatory concepts of CEI andl ONA rate entity can improve cost accounting; the U.S. ap-raise a set of issues far too complex to be explored in proach toward deregulating AT&T and its operatingdepth here. It should be noted, however, that some ex- companies made use of the concept of a separate sub-ecutives in the telecommunications sector believe that sidiary to improve accountability for costing and pric-CEI and ONA will ultimately stimulate services that de- ing of services. It can be useful for the development andpend on the basic network because more information marketing of services to structure services around aabout physical and software-related interfaces will be group of corporate entities; productivity can be im-made available. proved as the entities come to be viewed as separate

The process of determining what network capabili- profit centers in the organization.ties will be unbundled in an oNA environment is at pres- The flexibility afforded by a separate corporate entityent part of a far-reaching effort known as the ONA can improve the responsiveness of an administration toForum. The goal of the Forum is to define such so- changes in the telecommunications environment. Long-called basic service elements and to ensure the uni- term strategic planning can be enhanced. In this re-formity or operability of interfaces among the various spect, French policy, with its use of the filiales to en-Bell operating companies. sure flexibility and to serve as a competitive spur, has

The policies emerging in the United States to make been most successful in maximizing efficiency withinavailable the capabilities and elements of the local ex- the DGT.change network have implications worldwide. Once Although the questions of corporate status and formproviders develop third-party services based on access are intended to enhance the competitiveness of theto network signaling or other network capabilities, the dominant provider, it is also important for the providerEuropeans and the Japanese may find it necessary to re- that was formerly a monopoly not to have the oppor-spond. If such services are offered internationally, as tunity to thwart nascent competition and for any suchseems likely, U.S. and European policies with regard to competition to be fair. To ensure such fairness, regula-network interfaces may have to converge. Both nation- tors have often relied on the policies aimed at ensuringally and internationally, the questions of access to ifacil- access to the facilities of an underlying carrier, as de-ities and of the relationship between facilities-based and scribed in the preceding section. The intent of theseservice-based entities will thus be increasingly impor- policies is to afford nondiscriminatory, or at least com-tant to debates on industry structure. parable, access to interexchange or local exchange fa-

cilities. In this way, regulators hope to put the domi-The Role of the Dominant Service Provider nant service provider on the same footing, or almost

the same footing, as the new entrants.One of the most basic issues concems the role of the Other competitive safeguards have evolved, however.dominant service provider in offering new services. In In some countries, such as the United States, regula-moving toward a more competitive environment, the tors have insisted that the service being offered by thequestion is how to handle the provider that was for- dominant provider and by its competitors be built inmerly a monopoly. How should the balance be struck the same way. That is, if the competitor obtains under-between freeing-and restraining-AT&T, KIT, or Brit- lying transmission capacity under tariff (or by con-ish Telecom in responding to new competitors? What tract), then the dominant service provider must pay forsafeguards are necessary to ensure fair competition? transmission capacity and obtain it in similar fashion.

One rationale for enhancing competition is to im- According to these policies, the established carrierprove efficiency in the telecommunications sector. As must offer services that compete with the services ofa unit of the govemment, a Prr may not be able to oper- other carriers only at arm's length. In its implementa-ate flexibly. Its financing options may be constrained, tion, this separation has produced a wide and bewilder-it may have difficult reporting or supervisory relation- ingly complex range of regulatory policies that includeships, it may be unable to compete with the private sec- restrictions on cross-subsidization, the separation oftor in hiring and retaining individuals with the neces- costs, and, as was required by the FCC's Computer II de-sary business and marketing acumen. cision, fully separate subsidiaries with no common or

In unleashing the dominant service provider, a range shared network facilities.of options is available. The British and the Japanese In Japan, the MPT has subjected Type I entities, suchhave chosen to privatize British Telecom and N'r, re- as NTT, to much more rigorous oversight of rates than

Options and Developments in the Telecommunications Sector 51

it has Type II entities. All Type I entities-NTr and its ers? When decisions are taken, how much explanationcompetitors-are, however, treated alike, and such will be required? Will there be any opportunity to mod-comparable treatment of the old and new providers has ify new policies? When a new regulatory process is de-been criticized. Conversely, the differences in the de- veloped, such procedural questions must be addressed.gree of regulatory scrutiny to which the Fcc has sub- Regulators will of course also confront a perhapsjected AT&T and its competitors have also elicited some even more perplexing array of substantive issues, manycriticism. of which have been identified in the preceding discus-

In formulating telecommunications policy, striking sion. In particular, regulators will find it worthwhile tothe regulatory baiance between the dominant, estab- focus on issues relating to pricing policies and pricelished carrier and new competitors is one of the most competition. Will they require the dominant servicedifficult issues. However policymakers decide to struc- provider and its new competitors to adopt formal ac-ture their sector, they will need to pay careful attention counting methods? Will they make it necessary to re-to this issue if they are to make sure that the objectives port costs in accordance with prescribed accountingunderlying their new policies are achieved in ways con- methodologies, such as the fully distributed or incre-sistent with their national environment. mental costing approaches? What procedures will regu-

lators establish to deal with controversies over rates?The Regulator's Role Will rate increases be keyed to a formula, such as the

consumer price index cap that is a condition of the Brit-A review of the massive changes taking place in tele- ish Telecom license? If a price cap is used, however,communications policies around the world reveals that how will regulators address claims that individual ser-altering industry structures is difficult without con- vices or particular offerings are being priced discrimi-comitant shifts in regulatory arrangements. In France natorily?as well as in the United Kingdom and the Netherlands, The point that must be emphasized, in summary, isliberalizing the environment to expose the dominant not that a particular regulatory approach or set of regu-service provider to some degree of competition has re- latory policies must be adopted but that substantivequired the establishment of a regulatory body indepen- change will inevitably lead to the implementation of andent of that service provider; in Germany, the policy de- independent regulatory process. Moreover, once suchbate on the future of the Bundespost has focused on a process has been developed, policymakers must stillseparating its operational and regulatory authority; in face a set of difficult substantive and procedural issuesAustralia as well, present discussions envision a situs in establishing the ground rules for competition.of regulatory power outside Telecom Australia. Such Two further points about the regulatory processseparation of responsibilities is necessary, of course, be- should be stressed. First, a more formalized exchangecause an entity cannot be simultaneously a vigorous of views among regulatory officials in Europe, Northcompetitor and a referee of competition. America, Japan, and Australia is likely to be of very

In recognition of this fact, new regulators and new great benefit. Within Europe itself, officials at the Com-regulatory processes are evolving in several countries. mission and national policymakers are now scrutiniz-The regulatory process varies from country to country, ing the Commission's role in harmonizing Europeanlargely depending on administrative practices. Nations telecommunications policies. One role for the Commis-are certainly not rushing to clone the Fcc, nor are new sion or regional institutions elsewhere in the worldcadres of communications lawyers likely to be propa- could be to encourage meetings of officials from regula-gated in France, Japan, the Netherlands, or the United tory bodies to discuss common problems and the rangeKingdom. Lawyers do not have to dominate regulatory of available options or solutions.processes; policymakers can devise means of resolving Second, policymakers and users sometimes see regu-disputes that do not depend on formal fact finding or latory processes as impediments to competition andadjudication. new services. This may not be the case, however; dis-

Nevertheless, some degree of formalism or discipline cussions among independent decisionmakers could fa-may have to be introduced into the procedures that will cilitate the development of new services on a regionalevolve to resolve disputes. The reason is that regulators or international basis.will want to be in a position to gather information and As transborder or international services emerge,to explain their decisions. How, for example, will the questions of market access assume increasing impor-wide range of players be informed of new policies or of tance. In the field of telecommunications, trade negoti-proposals for such policies? What opportunities for con- ations have dealt with these issues, most notably in thesultation will be available? If comments from the public talks between the United States and Japan that haveare made in writing, will they become available to oth- taken place over the past few years. Beyond a certain

52 Robert Bruce

point, however, some practical problems in implement- wA'TC-88 itself, has been entirely outside the reviewing new services and overcoming barriers to access can- of-and debates on-national telecommunicationsnot be addressed through trade talks. A new role for policy.regulators, then, might be to create a more open lproc- The important lesson is that national debates cannotess for resolving such problems by parties who are sen- be divorced from efforts to establish an internationalsitive to, and have expertise in, telecommunications- framework for services. WA'rrc-88 and the ongoing bi-related issues. lateral and multilateral discussions on trade in

services-all of which will be a key to structuringThe Intemnational Impact of New Policies value-added services on a global basis-are thus impor-

tant international factors in formulating national tele-communications policies.

Policymakers often fail to consider adequately-or in-deed at all-the international implications of adopting The Experience of Industrial Countriesrevised policies or new ones dealing with industry and Its Relevance to the Developing Worldstructure or definitional classifications. Each countryhas proceeded on the basis of different regulatory de-signs. The Japanese, the British, and the Americans It is becoming increasingly clear that telecommunica-have not thought through the ways in which the con- tions policymakers worldwide, whether in industrial-cepts of a service offered by a Type II entity, of a value- ized countries or in developing countries, are confront-added service, or of an enhanced service, respectively, ing similar issues and problems. The objectives arewould mesh when providers wanted to offer such ser- clear: boosting investment in the sector, improving effi-vices internationally. ciency, and reducing staff levels. As I have noted

Some of the resulting issues-the provision oif ser- throughout the present chapter, these goals are beingvices on an intemational basis-are now the subject of met by structural change that creates separate entitiesbilateral talks between the United States, the United to provide services to different groups or regions, thatKingdom, Japan, and other countries. Such discussions privatizes entities, and that, through legal or regulatorycan also take place on a regional basis. Within Europe, regimes, permits private sector involvement in new orfor example, the Commission is examining ways of rec- enhanced services.onciling the differing definitional approaches being Similar structural changes are already taking placeadopted by European national policymakers. in the developing world (see Chapter 12). New corpo-

In this chapter I cannot discuss in detail the pros- rate forms are being used to experiment and to inno-pects for such harmonization on a regional or intema- vate. The creation of separate entities to operate the tel-tional basis. A consensus is now emerging that agree- ecommunications networks in New Delhi and Bombayment is unlikely to be reached on a set of uniform are important cases in point (see Chapter 15). The evo-policies within Europe or intemationally. Policymakers lution of Syarikat Telekom Malaysia Berhad in Malaysiamust thus expressly evaluate the options for negotiat- is another significant example of structural change ining arrangements for the provision of international ser- response to economic imperatives outside the industri-vices. Unlike an approach based on substantive norms, alized world (see Chapter 16).negotiation will be more responsive to the changes in More autonomy in operation, the consequence of pri-the ever-evolving intemational environment as well as vately incorporating a service provider, can increase theto the difficulties produced by the disparity among na- maneuverability of the new organization in capital mar-tional policies. kets. Structurally separate subsidiaries or privatized en-

Regional organizations in Asia, Europe, and else- tities, whether in France, India, Japan, Malaysia, thewhere may want to examine closely the benefits of a United Kingdom, or elsewhere, can be used as financingnegotiation-oriented approach to establishing regional vehicles and to increase accountability to the market-arrangements for services; such discussions might be place.initiated in Europe, for example, by the Commission of Like their colleagues in the industrialized world, pol-the European Communities. Similarly, at the interna- icymakers in the developing countries are beingtional level, the current preparatory process for the forced to heed consumer demand. Consumers every-ccirT's 1988 World Administrative Telegraph and where want access to basic services, flexibility, and newTelephone Conference (WArrc-88) must now address services too. Pressure to install new or improved facili-how new international services should be provided. At ties and to develop new services is being felt in virtuallyleast until recently, in many countries discussion all countries; it may take the form of investing in basicof these important issues, and of the significance of facilities in developing countries and in enormous in-

Options and Developments in the Telecommunications Sector 53

frastructure expenditures for digital networks and for nications policies has not escaped the attention of poli-ISDN. cymakers in the industrialized world and may be of

Beyond the need for resources to install facilities, considerable significance in the developing world.policymakers are considering ways of liberalizing the Investment in telecommunications is essential to im-regulatory regime for providing new services. One rea- prove economic performance, largely because telecom-son for doing so, of course, is to shift the risk of devel- munications facilities and services are critical to the re-oping services from the public to the private sector. gional and global competitiveness of agriculture,Capital can be raised to launch new business services, natural resources, manufacturing, and services. Theperhaps through a separate organizational subsidiary trade component of the telecommunications sector isor through subscriber financing up front. New business therefore of considerable importance, even though do-services being planned in India may take this route. The mestic concems may make this aspect seem less imme-passage of legislation to permit joint ventures between diately relevant.the private sector and the provider of basic services, Policymakers in the developing world, lookingsuch as that which has been contemplated in Indo- beyond their national borders, are noting the impor-nesia, represents another approach with the same tance of being able to negotiate bilaterally. They wantobjective. to be able to function in the global environment, to

Policymakers in both the industrialized and the de- contribute to new forums worldwide, and to participateveloping worlds are finding that it can be difficult actively in conferences such as the wArrc-88 and withto satisfy the demands of the large users. Bypass tech- a clear sense of their significance. Telecommunicationsnologies and a political or social unwillingness or in- ties to other sectors are forcing these nationalability to reprice services so as to minimize economic decisionmakers to examine the need for developingincentives for bypass arouse concern in the developed trade relationships and new arrangements for structur-world. Elsewhere, large users may be frustrated by un- ing the provision of international telecommunicationssatisfactory or scarce telecommunications services. As services.in India, such users may therefore have significant in- The developing countries must address many issuescentives for developing their own networks, to the dis- that also confront nations of the industrialized world,may of the national monopoly provider and planning and they of course have in addition enormous problemsagencies. of their own. To exchange views on the wide range of

Structural change must be accompanied by new cost substantive and regulatory problems that they con-accounting schemes. When separate entities are cre- front, policymakers in the developing world mightated to provide domestic services, new access arrange- want to build up new forums, perhaps on a regionalments and charges must be developed. Analogous is- basis. The problems in Asia, for example, are not identi-sues arise from the separate provision of domestic and cal to those of Africa. An international forum, in whichintemational services. Where two entities are involved, discussion of problems could take place regionally aspolicymakers must decide which entity provides which well as intemationally, could valuably supplement theservices, how far into domestic and intemational work of the World Bank, the Intemational Telecommu-spheres the two entities are permitted to do business, nication Union, and the Centre for Telecommunica-and how the international entity shares revenues with tions Development.or compensates the domestic provider for originationand termination services.

The relationship between changes in substantive pol C- nclusionsicies and other, procedural changes is well understoodin the industrialized world and is increasingly receiving The cumulative impact of shifts in telecommunicationsattention in the developing countries. Oversight of policies worldwide now virtually requires nationala new telecommunications structure requires new reg- change. Thus the question is no longer "Is deregulationulatory institutions. These bodies will review the per- a passing fancy?" Rather, changes elsewhere, and theformance of a separate subsidiary or a privatized pro- pressures to maintain national competitiveness in avider, set tariff policies, ensure that service is provided global economy, have made change unavoidable.nationwide, monitor transitional issues (including The fact that changes are taking place globally doesstaffing and access arrangements), and implement a not, however, mean that policymakers are forced to se-framework for value-added service or the joint pro- lect any one particular option. Policymakers no longervision of service by public and private sector orga- face a stark choice between a monopoly environmentnizations. and unrestrained competition in all facets of the tele-

The international aspect of formulating telecommu- communications industry. From the national policy re-

54 Robert Bruce

views around the world a myriad options have emerged. gin and their nature.They involve varying degrees of, and arrangements for, Moreover, even after a policy has been chosen, thecompetition in network facilities and in services using flux in the national and international environments willsuch facilities. Quite simply, there is no single para- necessitate constant refinement and reorientation. U.S.digm or model for deregulation against which national policies with respect to Computer II, Computer III, andoptions can easily be measured. the Modified Final Judgment (the decree that ended the

National policymakers must address a host of issues, antitrust suit against AT&T in 1982), for example, appearmany of which have been identified in this chapter. At to be in the midst of considerable flux as are policiesthe threshold, they will need to assess the relevance of elsewhere. It is not necessarily wise or appropriate tothe various policy questions for their countries., As maintain the status quo or to adhere unswervingly tonoted above, the massive changes taking place in the a particular policy choice. Instead, these ongoingindustrialized world are relevant for the developing changes in national policies reflect no more than theworld. They certainly have an impact on the industria- fact that change tends to beget change and that com-lizing countries. Furthermore, the issues and difficul- petitive arrangements must constantly be fine-tuned.ties besetting the developing countries have paral- In other words, the half-life of national telecommu-lels in the industrial nations. Some of the substantive nications policies is being shortened by increased rival-and regulatory responses to change that are being de- ries in the intemational arena, by new technologicalveloped in the developing nations increasingly re- developments, and by new economic pressures. Na-semble those of the developed world. Policymakers tional policymakers must be prepared for the realityaround the world may therefore profitably examine the that the review of telecommunications policies is a con-applicability or utility of adapting one or more of the tinuing process: it does not begin and end with theparticular national responses that have been adopted or drafting of a new telecommunications law.are being discussed in the industrialized nations. Telecommunications policymaking is a necessary in-

The number of pressures for change, and the variety teractive process that is here to stay. The brief reviewof the national responses thereto, strongly indicate that of discussions worldwide that I have presented in thisthe impetus for policy shifts cannot readily be discarded chapter will, I hope, make a small contribution to theas an ephemeral fascination with deregulatory initia- present and future discussions on restructuring andtives in the United States. The global pressures prompt- managing the telecommunications sector in the indus-ing these reviews of telecommunications policy are trialized and developing world.clearly far more complex and diverse in both their ori-

~~~~~~~~6

The Privatization of Telecommunications in theUnited Kingdom

John A. C King

In November 1984 the shares of British Telecommuni- emerged and have affected the role of many public sec-cations Public Limited Company were floated in the tor corporations.first of the large privatizations of public sector compa- Our current govemment believes that competition isnies to have taken place in the United Kingdom. Al- beneficial to the health and wealth of the nation. 'Lib-though changes had occurred in telecommunications eralization," the word we use for the introduction ofelsewhere, particularly in North America, the privatiza- competition, has taken place in a number of sectors,tion of British Telecom and the liberalization of the notably in telecommunications and in the financialU.K. telecommunications market surrounding that structure of the City of London. It is govemment's viewevent were truly pioneering. For the first time we saw that it should be involved in governing and not activethe transfer of one of the largest U.K. public sector cor- in the management of business, so that as a second ob-porations to the private sector. We have since then jective there has been and continues to be a push to-leamed a great deal in the United Kingdom, and it is ward placing business under private sector manage-evident from the conversations that I have had with ment.many countries around the world that our experience A third objective has involved wider share ownership.has created great interest. Until the early 1980s individual ownership of shares in

In this chapter I will briefly review the background companies had declined, the only significant participa-of the strategy in the United Kingdom, the phases of tion being indirect, through pension funds and otherchange in the preparation period before privatization, funds. Just as govemment had embarked on a programthe privatization event itself, and the three years of ex- to increase house ownership, particularly in relation toperience that have followed, with a glance forward to the sale of local authority-owned properties, the gov-further possible changes in our regulatory environ- emment wished to encourage individuals to own morement. I will then assess the impact of the U.K. changes shares, and the privatization of large public sector cor-on the stakeholders and conclude with some observa- porations was seen as a convenient vehicle to achievetions that may be of benefit to other countries now con- this objective.sidering a change in their telecommunications envi- Table 6-1 shows the major privatization events thatronment. have taken place in the United Kingdom. It can be seen

that the first of the major sales involved the privatiza-The Political Background tion of British Telecom in 1984.

Why was telecommunications chosen as the first ofthe large privatizations? I believe that teleconmnunica-

The election of a Conservative govemment in 1979 and tions represents a natural choice for a move into theits reelection in 1983 and 1987 created a period of con- private sector, as the industry is subject to a num-tinuity in the U.K. strategy with respect to the public ber of driving forces. In the first instance there is asector. In particular, a number of philosophies have well-known and well-understood phenomenon of con-

U

56 John A. C King

Table 6-1. Privatizations m the United Kingdom as essential in a nation's infrastructure to support eco-nomic well-being, regardless of a country's economic

Govemnment Amountanpoiclmtutyshareholding raised and political maturity.

sold (millions Year of In combining these driving forces, one is left withCompany (percent) of pounds) flotation the need for a political resolution of the problem, be-

British Aerospace 50 150 1981 cause regulatory change is required. This environment,Cable and Wireless 49 225 1981 in line with the general strategies of our U.K. govem-

28 275 1983 ment, led to the choice of telecommunications as theBritoil 51 550 1982 first major privatization of a public sector corporation.

Bntish Telecom 50.2 3,900 1984 It is as well to remember that the thinking and prepara-British Gas 97 5,400 1986 tion for the change in the United Kingdom began in theBritish Airways 10 9o00 1987 early 1980s, so that we can now look back on sevenRolls Royce 100 1,360 1987 years of experience with a particular solution applied toBritish Airports Authority 100 1,270 1987 a specific country environment.

Source: Relevant prospectuses.The Phases of Change

vergence of the technologies of data processing and tele-communications; the two industries that have hith- 1980-83erto been quite separate are moving rapidly together.This convergence, involving the whole area of informa- The development of the new telecommunications envi-tion technology, is irresistible and will continue to con- ronment in the United Kingdom involved much publicfuse the technological boundaries of definition between and private debate over the options being evaluated andthe industries. considered, including argument in Parliament leading

Second, the user increasingly depends on telecom- up -to the passing of the new Telecommunications Actmunications as he strives to compete effectively in and, eventually, the change of status of British Telecomwhatever business segment he operates. Many busi- to British Telecommunications PLC in the middle ofnesses and organizations now seek a tailor-made so- 1984. As this chapter is directed toward an understand-lution appropriate to their business activity that ing and appreciation of an example of privatization, Iembraces information systems composed of data pro- will spend little time considering the arguments overcessing and telecommunications activities. The user is the options that were available to government in thetherefore seeking flexibility in the development of a so- early 1980s, but it may be worthwhile to comment onlution for his business and necessarily needs to capital- one or two major items that others are now addressing.ize on the services provided by both the data processing First, there was much discussion as to whether orand the telecommunications suppliers. not British Telecom should be split up. It is worth not-

Unfortunately, a third driving force operates in the ing that in size British Telecom is close to any of theopposite direction because from a regulatory point of U.S. regional Bell operating companies. It was feltview there is a divergence between the data processing that splitting it into smaller units would be inefficient,and telecommunications industries. Whereas data pro- and there was much resistance from within the com-cessing is an open, competitive, innovative environ- pany itself to the problems of handling two changesment, telecommunications remains largely a monopo- simultaneously, that is, the shift from the public tolistic and heavily regulated activity. This divergence, the private sector and the breakup of an integratedwhich is inhibiting the achievement of user wishes, can organization.be resolved only by change in the regulatory environ- Second, the capital restructuring of the company wasment. Although it could be argued that one solution is a major task in creating the appropriate debt/equity re-to create a heavily regulated data processing industry, lationship that, on the one hand, had to recognize thethis idea is not really in tune with current thinking, and prior govemment investment in the organization and,the only obvious conclusion is a deregulation, or libera- on the other, would allow the company to fund its fu-lization, of telecommunications to create an environ- ture growth and development in the private sector.ment of greater freedom, innovativeness, and parti- Third, the licenses under which the former monopo-cipation by the private sector that will bring tele- list and others could operate had to be carefully struc-communications closer to the style and indeed the tured, so that each had both obligations and opportuni-dynamics of the data processing industry. ties that in total could best serve the public interest.

Furthermore, telecommunications is now perceived Finally, the issue of national interest was of course

The Privatization of Telecommtmications in the United Kingdom 57

key, and a number of measures were incorporated in emment, but attracting over 2 million individual share-both the telecommunications license and the articles of holders; 96 percent of company employees also becameassociation of British Telecom to ensure a degree of shareholders. There was of course much argumentprotection-for example, that no single shareholder after the event about the offer price of the shares, butcan have more than 15 percent of the shares, that two it must be remembered that there was tremendous riskof the nonexecutive directors are government ap- involved in that there had been no experience with apointed, that the chief executive should be a British cit- flotation of this size. On balance, it was probably moreizen, and that a golden share, held by government, important for the flotation to be a success even if thecould be used to resist any unacceptable change in the price was perhaps a little generous. The subsequentarticles of association of the company (in other words large privatizations that I mentioned earlier have fol-any major change to the mission of the business). lowed a pattern very similar to that pioneered by the

It is important to understand that as the vigorous de- team handling the flotation of British Telecom.bate over the nature of the new telecommunications The other major event in 1984 was the establishmentenvironment proceeded, certain steps in liberalization of the Office of Telecommunications, OFTEL, the inde-had already taken place, such as the rapid introduction pendent regulatory body set up to supervise the imple-of competition in customer premises equipment, the mentation of the new strategies and licenses in theemergence of a new network supplier, Mercury, and the United Kingdom. It is perhaps regrettable that, in theintroduction of competing cellular radio operators. BT search for greater competitiveness and greater freedomitself began the massive restructuring necessary to pre- in an exciting area of technology, the imperfections ofpare for privatization and subsequent existence in the natural competition make regulation still necessaryprivate sector. The chairman of the company, Sir and require the establishment of a watchdog to ensureGeorge Jefferson, who had come into the organization that all parties follow the rules and that user interestin 1980, set about changing the company from the top, is protected.organizing it in divisional terms, introducing outsiders By the time British Telecom was privatized, the proc-into the Board of Management, and throughout the ess of liberalization was well under way and competi-structure integrating outsiders, particularly in market- tion existed in a number of areas. The second licenseding and finance, with the existing staff. The massive fixed network operator, Mercury, was of course still attask of creating a management accounting process, a very formative stage, and the licenses awarded to Brit-which had not existed at all, was initiated, along with ish Telecom, Mercury, and others were established inheavy investment in related data processing activity. Of such a way that for the former monopolist, British Tele-the top 600 directors, managers, and professionals in com, many service obligations were included and forthe company today, one-quarter were recruited from the newcomers an extensive degree of opportunity pro-the outside since 1983. So the period 1980-83 was one vided for entry into the market.of great change within the company in an external envi-ronment that was competitive and in which the regula- 1985-88tory environment was yet to be finally defined.

The last three years illustrate the real life experience1984 of a privatized telecommunications operator function-

ing in an increasingly competitive environment. Al-In 1984 the licenses were finalized and the structure of though the licensed second fixed network operator,British Telecom was clarified in readiness for flotation. Mercury, remains very much smaller than British Tele-The major issue during the year, however, was the com, the interconnect agreement between the two op-whole program related to attracting investment. A erators ensures that Mercury can obtain access to manyheavy public relations and advertising campaign was in- BT customers even though it may not be providing theitiated in order to present the company to the public local access itself. While Mercury is in its growth phase,as well as to institutional investors. This was unknown capitalizing on the fact that it can use the very latestterritory: never before had an attempt been made to sell equipment, British Telecom has been passing throughshares in a large organization on such a wide basis. The a massive modemization program catching up on theconcept of road shows was created, and teams repre- underinvestment of prior decades when the companysenting company management and advisers carried out was under govemment control and repeatedly re-local and intemational tours to present the company stricted in its capital investment programs. The extentand describe the flotation offer in detail. and pace of this modernization program are often seri-

The rest is history. The flotation was an enormous ously misunderstood, and today the company is dailysuccess, not only raising nearly £4 billion for the gov- spending £6 million in new capital programs and is in-

58 John A C. King

stalling two new digital exchanges somewhere in the some of it inaccurate and uninformed. Underlying thecountry. In order to be fully competitive in meeting the criticism there have been problems that the companydemands of its customers, British Telecom had to solve has had to handle. These have derived partly from anproblems with its strategy for sourcing of supplies and unfortunate strike in the spring of 1987, but more gen-has moved toward competitive bidding for public erally they related to the shift from an old network toswitching, buying not only the System X digital ex- a new one at an extremely rapid pace that we believechange (in which it had invested large sums for devel- to be unprecedented in any country. The company hasopment) but also a locally supplied version of the been taking vigorous steps to establish and publish theEricsson AxE-10 digital telephone exchange that we call quality-of-service standards that we are aiming for. WeSystem Y. This competitive bidding environment has expect the criticisms to disappear as we reach the qual-assisted the company in securing deliveries of public ity of service that the public deserves. Still, it shouldswitching at a more competitive price. be understood that the privatization of the company

The pricing regime that was developed in 1984 pro- cannot be expected to cure the errors and deficienciesvides an opportunity for British Telecom to enjoy the of the past ovemight. Certainly the principle of privati-benefits of efficiency. It does so through controls on a zation should not and must not be discredited simplybasket of charges which ensures that yearly price in- because a privatized company has not been able to pro-creases are three percentage points below the level of duce a perfect service instantaneously.inflation (measured by the retail price index). Withinthis basket we have the opportunity to rebalance our 1989-tariffs, and we have done so, as the returns on assetsinvolved in local and long-distance traffic were wide In 1989 we will have had five years of experience withapart. This method of price control, as opposed to a our current regulatory environment. The rules estab-limit on return on equity, ensures that overall the con- lished at privatization envisioned a review at this time.sumer is protected, because in real terms telephone The first five years will see the progressive but persis-charges decline, but at the same time it enables the op- tent introduction of competition while enabling Britisherator to enjoy the benefits of greater efficiency derived Telecom to continue its process of modernization andfrom the use of better equipment and from improved change and enabling the new entrants to become effec-working practices. tive and established in the marketplace. The process of

Another aspect of existence in the private sector has compromise that is inherent in the structure of ourbeen the ability of British Telecom to develop strategies current regulatory environment is also helpful in mini-for new businesses both at home and overseas. The mizing disruption in the marketplace. The issues con-company has embarked on two major programs of de- ceming the regulatory environment after 1989 includevelopment. One is in the area of information systems the areas of continuation, or not, of the duopoly in fixedand services, producing not only new value-added ser- network operations; the revisiting of the pricing con-vices on a local and international basis but also special- trol mechanism, RPI-3; the resale of basic communica-ized systems and products in a number of areas. In- tions facilities, closely related to definition of value-cluded in this development was the acquisition of 51 added services; and the delicate issue of quality ofpercent of MITEL, the Canada-based manufacturer of service in that the regulator is under some pressure toprivate automatic branch exchanges and related sys- establish mandatory performance standards for opera-tems, which gave the company access not only to an tors.excellent product development company but also to a At this time, the outcome of these deliberations isnumber of overseas markets in which the MITEL prod- uncertain, with many parties having an interest in pro-ucts were already installed. A second development took posing changes to the regulatory environment. It isthe experience and expertise of the company into other certain, however, that the process of change will con-parts of the world. This is the responsibility of my own tinue and that the telecommunications environment indivision. We are now very active in projects and oppor- the United Kingdom, already a very open and competi-tunities in many countries, particularly the developiing tive environment, will continue to offer the consumercountries, in consultancy, tumkey projects, manage- greater choice and flexibility.ment contracts, and equity investment.

The excitement of privatization in 1984 may wellhave led the public unreasonably to expect a rapidAtansformation of both performance and attitude in theformer monopolist. This year there has been criticism In trying to assess the experience with privatization ofof the quality of service provided by British Telecom, telecommunications in the United Kingdom, it may be

the Privatization of Telecommwzkations mi the VUnited Kingdom 59

helpful to view the experience from the standpoint of inefficient practices that result from decades of negotia-a number of stakeholders in the business-custom- tions over the responsibilities of each job grade. Theers, shareholders, employees, the government, regu- company is encouraging greater flexibility and is at-lators, suppliers, competitors, and the media. tempting to introduce a system of remuneration that

It is probably true to say that customers have yet to rewards performance rather than automatic annual in-experience the full benefits of change, as our program crements. It is particularly encouraging to report thatof modernization of the network, so badly needed, is despite the original purchase of company shares, whensomewhat incomplete and the objectives of the com- 96 percent of employees participated, about 40 percentpany to perform to the standards of the top telecommu- of the staff contribute regular savings each month tonications operators in the world probably cannot be at- a share save scheme that gives them the option at thetained until about 1990. Customers do have a much end of a specified period of having the savings back withwider choice of equipment, however, both for business interest or converting them on an option basis intoand for residential purposes; they can access a second company shares. One must note that this developmentfixed network supplier; they can choose between mobile sharply contrasts with the advice of the unions at thecommunications from two aggressive competing com- time of flotation, when employees were advised not topanies (in one of which British Telecom has a major take up the share offer.part to play); and in real terms telephone charges have The government has received £4 billion for the saledeclined. Apart from the short-term disruption in ser- of its 51 percent holding and has declared that in thevice standards during this year, there has been steady future it will sell off all or part of the remaining 49 per-improvement in the provision times for new lines and cent. In addition, through dividends and taxes, last yearservices and in the company's ability to respond to alone the company contributed£1.4 billion to the Trea-faults. sury; the govemment should be more than satisfied

Until the recent abrupt decline of the stock markets, with the financial impact of privatization. Although itshareholders who bought British Telecom shares at flo- holds 49 percent of the shares and has nominated twotation time at 130 pence were seeing the value of their directors, the govemment does not interfere in the day-shares roughly doubled and a yield on their invest- to-day decisionmaking of the company. The relation-ments exceeding the average for the U.K. stock market. ships between the company and govemment are thoseToday the company is viewed as a defensive investment shared by other large, responsible companies ratherand retains the attributes of both a utility and an in- than any particular relationship derived from the his-formation technology company, which is somewhat torical fact of state ownership. Also the breakthroughunique, particularly as the company has heavy research in individual share ownership achieved by the Britishand development activity, relatively rare for a telecom- Telecom flotation has, with the other major privatiza-munications operator. tions, created 9 million individual shareholders, more

Employees, many of whom for the majority of their than double the level in 1983. Few would disagree thatworking careers have been in a civil service environ- British Telecom today has a new drive and commercialment, have encountered a major cultural change. Al- vigor resulting from the opportunities and responsibili-though many of them certainly did not ask to be moved ties of operation in the private sector.to the private sector, they have adapted remarkably What about the media? Bad news sells newspapers,well. Many welcome the freedom and opportunity of the not good news; we as a large and well-known organiza-private sector. The balance between the role of manage- tion have been subject to a heavy media attack largelyment and the unions has progressively changed. Before in relation to the issue of quality of service. This is fre-privatization, managers were rather more administra- quently connected to the size of the profit that wetors and the unions acted as the major path of commu- make, and the figure of £2 billion profit before taxnication to employees; today it is the managers who has been described as obscene. What is so often over-manage and who communicate with the staff. Unions looked is that in terms of return on capital it is a per-retain an important role in the organization, and much fectly respectable level and comparable with that ofdebate continues over changes in working practices other major corporations. It also needs to be comparedthat are essential to the future efficiency of the organi- with our tumover, which is near to £10 billion. It iszation. Flexibility in employment terms and conditions encouraging to note that the regulator has stated pub-has been introduced, particularly for the more senior licly his belief that the profits we earn are reasonablestaff. So far, staff tumover has been largely through at- for the type of industry in which we operate. The media,trition, although the full impact of reduced manpower however, have chosen to criticize the absolute valuelevels will not be felt until our modemization program of profit by comparison with the service that weis complete. Ongoing problems are those inherent in provide.

60 John A. C. King

The U.K. regulator, the director general of OFTEL, has Conclusionshimself pioneered a new environment and not only hasresponsibility for ensuring that the licensed operatorsobey the rules but also monitors very closely the inter- Although there is no single correct solution for imple-ests of the users so as to be satisfied that competition mentation, perhaps the pioneering efforts in the Unitedand user choice is real. The regulator is politically and Kingdom can help in the development of new ap-financially independent of government, and he exer- proaches in other countries. The transformation in thecises his independence vigorously. His view of the expe- United Kingdom is not yet complete, however, particu-rience of the last few years will of course be a major larly in regard to the technological, organizational, andfactor in recommendations for any change in the regu- cultural aspects of British Telecom. In any case, thelatory environment after 1989. Regulators in other goal is continually advancing.countries are affected by the changes in the United There is no doubt that the maturity of the country,Kingdom. The erosion of the traditional bilateral agree- and in particular the maturity of the telecommunica-ments between telecommunication operators, for ex- tions network, is very significant in determining a fu-ample, has been accelerated by changes in North Amrer- ture program of change. The introduction of competi-ica and in the United Kingdom. Then, too, OFTEL tion not just in equipment but indeed in networks, forexperience and views are continually sought by others example, is both feasible and practicable in a countrywho are exploring the possibilities of change within with a mature network. It does, however, becometheir own countries. rather more difficult in a developing country, where the

It is probably an understatement to say that the tele- main priority remains the development of the main tele-communications supply industry in the United King- communications infrastructure.dom was rather unenthusiastic about the changes, suim- The term "privatization" has, I suspect, been some-ply because so many of its members had a large captive what misused, and it seems to me that for the develop-customer in British Telecom, which, to say the least, ing countries the main issue is how to gain effective ac-made life comfortable. The disadvantage of a large cap- cess to private capital in order to speed up thetive customer at home is that enthusiasm for export is enhancement of the national telecommunications in-diminished. There are already significant signs of a frastructure, whether on a national basis or perhaps onchange in attitude from the U.K.-based industry, now a regional basis. This is a separate issue from that ofthat the home market is open to many suppliers and the restructuring of the postal, telegraph, and tele-the proposed rationalization of the industry reflects not phone services, where the natural desire is to create aonly the changes at home but the nature of the world- spirit more related to the commercial world than thewide telecommunications market. To be fair, the U.K. civil service environment. I believe that the restructur-telecommunications industry does operate at a great ing or commercialization of many existing operationsdisadvantage in that the market at home has been liber- is appropriate in any case and, more important, is a pre-alized and is competitive, whereas many markets requisite to the successful privatization of the state-around the world remain heavily protected, with very owned enterprise, either wholly or partly. The transferhigh barriers to entry. of the state telecommunications operator from public

It may be surprising that I include competitors in my to private status will be truly effective only when thelist of stakeholders. Still, as the dominant supplier of style and efficiency of the organization can be demon-telecommunications the company must compete firrnly strated to be attractive to the private investor as wellbut fairly in the marketplace, and the standards that it as to governments. The dilemma, of course, is how tosets both technically and commercially are of signifi- motivate such an organization to change in the absencecance to competitors, particularly small ones that oper- of competition. The experience in the United Kingdomate in narrowly defined sectors of the market. British is that competition is an excellent agent for change.Telecom welcomes competition and believes that it isan essential spur to change and to the creation of aninnovative approach within the company.

Deregulation of Japan's TelecommunicationsBusiness and the Role of Kokusai Denshin Denwa

Nobuyoshi Mutoh

On April 1, 1985, Japan's new Telecommunications kind of telecommunications services, including tele-Business Law (referred to here as the Law) came into phone, facsimile, data communications, and enhancedforce and introduced competitive principles into Ja- services. The categories are defined, rather, on the basispan's domestic and intemational telecommunications of facility ownership.business. It replaced the former Public Telecommuni- A Type I telecommunications business provides tele-cations Law, which provided for only two telecommuni- communications services by establishing its own tele-cations carriers: Nippon Telegraph and Telephone Pub- communications circuit facilities. A Type I carrierlic Corporation (Nr), the sole domestic carrier, and constructs and operates the telecommunications infra-Kokusai Denshin Denwa (KDD), the international car- structure essential to both the daily life of the pub-rier. Both were publicly owned companies. lic and national industrial and economic activities.

Consequently, the Ministry of Posts and Telecommuni-Japan's Telecommunications Business cations (MPr) must give permission for the establish-under the Law ment of Type I carriers. Type I telecommunications

businesses are, moreover, asked to specify service ratesand other conditions in their tariffs and to obtain au-

As the Law was being introduced, Nippon Telegraph thorization for tariffs from the MPT. The proportion ofand Telephone Public Corporation was reorganized to foreign ownership in a Type I business entity is limitedbecome a private company under the name of Nippon to less than one-third; foreign investment in NTTTelegraph and Telephone Corporation. The change of and KDD is, however, not allowed under the Nrr andthe telecommunications legal framework and privatiza- KDD laws. A Type II telecommunications business pro-tion were designed to vitalize Japan's telecommunica- vides telecommunications services by using telecom-tions business and to improve its productivity with the munications facilities leased from Type I carriers.objective of providing the Japanese public diversified Foreign investment is not restricted in a Type IIservices at the lowest possible prices. Japan's telecom- business.munications business thus entered a new era in which Type II businesses are further divided into specialusers could choose any telecommunications carrier or Type 11 and general Type II businesses. A special Typeany type of service available. II telecommunications business provides large-scale

telecommunications services for a large number of un-he Telecommunications Business Law specified persons or provides telecommunications ser-

vices between Japan and foreign points. Special Type IIThe Law classifies telecommunications businesses into carriers must register themselves with the MPT andtwo main types: Type I, or facility-based businesses, and must notify the MPT of their service rates and otherType II, or resale businesses. This classification is not conditions.based on the types of services provided, so that carriers General Type II telecommunications businesses arein both types of business are allowed to provide any any Type II businesses other than special Type II busi-

61

62 Nobuyoshi Mutoh

nesses. Because they provide services to specified users, whereas some of them also provide voice and facsimilesuch as business groups, and because their influence is transmission services.relatively limited, general Type II carriers need notify As of February 1988, 475 companies had notified MPTthe MPT only of their intent to start operations. General of their intentions to operate general Type II businessesType II carriers are not required to notify the MFT of (including eighty-five companies that had been value-their service rates or other conditions. Table 7-1 sum- added network (VAN) service provide,s under the formermarizes the framework of Japan's Telecommunications Public Telecommunications Law and were recognizedBusiness Law. as general Type 11 carriers on the day the Law became

effective).Entrants into the Domesfic Market

Entrants into the International MarketVery soon after the Law came into effect on June 21,1985, five companies obtained permission from the MPT In the international telecommunications business field,to operate as Type I businesses in the domestic market. two companies have applied for licenses to become in-Of these, three are terrestrial carriers, whereas the temational Type I carriers, or so-called KDD 2s (seeother two are satellite carriers. In March 1986, a sixth Table 7-3). The first is a group organized mainly bycompany, Tokyo Telecommunications Network Com- three large trading companies (Mitsubishi, Mitsui, andpany, Inc., was established. It was authorized by the Sumitomo), which established a joint feasibility studyMPT on August 8, 1986. (See Table 7-2.) company called International Telecom Japan, Inc. (IT)

Three of these companies, Daini Denden, Inc. (DDI), in July 1986 and applied for a license to become a TypeJapan Telecom, and Teleway Japan, started to operate I carrier in September 1987. The second has been or-domestic long distance telephone services in competi- ganized mainly by C. Itoh, a trading company; Toyotation with Nrr in September 1987 in addition to the Motors; and Britain's Cable & Wireless (c&w), which es-leased circuit services that they had started providing tablished a feasibility study company called Interna-a year earlier. Their services are priced about 20 per- tional Digital Communications (lDc) in November 1986cent lower than those of Nrr. and also applied for a license to become a Type I carrier

As of February 1988, seventeen companies had regis- in September 1987.tered to operate special Type II businesses. Of these, six Initially the MpT had suggested that, because Japan'swere originally engaged mainly in information process- intemational telecommunications business market wasing, five were communications equipment manufactur- expected to be much smaller than its domestic telecom-ers and their affiliates, and the remaining six were munications market, only one carrier could be justifiednewly established to enter into this business. All of to compete effectively with KDD. The MPT had hopedthese companies provide data transmission services, that the two potential entrants would merge into one

Table 7-1. Framework of the Telecommunicafions Business Law

Entry ForeignClassification Type of business procedure Tariff ownership

Type I Provision of telecommunications Permission Authorization Less thanservice by establishing carrier's; one-third butown communications circuit none forfacilities Nrr and KDD

Type 11Special Type 11 telecommunications Registration Notification No regulations

business over a certain scale foran unspecified large number ofusers and Type II telecommunicationsbusiness between Japan and foreignpoints,

General Type II telecommunications business Notification No regulations No regulationsother than special Type IIteleconmmunications business'

a. In addition, both special and general Type II businesses provide telecommunications services by acquiring telecommunications circuit facilitisfrom Type I telecommunications carriers.

Derguklfon of pam's Tekcmnmwkatdons BusIss 63

and would thereby satisfy the largest possible number common carrier cables such as TransPacific Cable 3of investors. The two core companies discussed this (TPC-3) and the Hong KongJapan-Korea (H-J-K) cablepossibility several times and used as a basis the media- on the basis of indefeasible right of user (RU) or owner-tion plan proposed by the Japanese Federation of ship. IDc plans to provide international leased circuitEconomic Organizations. Because there existed an service from May 1989 and intemational telephoneunbridgeable gap between the respective concepts service from October 1989 using INTELsAT satellites, theof corporate policy, however, the talks were unsuc- H-J-K cable (as a co-owner) and the North Pacific Cablecessful, and the two companies filed for separate (originally called P-PAc), to be built by a consortium or-licenses. ganized by IDc, c&w, and other foreign companies in

ITJ plans to provide international leased circuit ser- 1990. Applications of both companies for licenses to be-vice from April 1989 and international telephone service come Type I carriers were examined by the MPT in ac-from February 1990 by means of INTELSAT satellites and cordance with the provisions of the Telecommunica-

Table 7-2. New Entrant into the Domestic Telemmunwications Market (January 31, 1988)Capital Major Tekcommkmations TelecommuticatIons

Carrirs (bgions ofyen) sharholders $nicfs Servie Area failite

Daini Denden, Inc. 8 Kyocera Corp. Leased circuits Tokyo Metropolis, Microwave radio(25.5%) (October 24, 1986) Aichi Prefecture, system

Long distance Osaka Prefecture,telephone service and their(September 4, 1987) vicinity

Japan Telecom Co. 9 Japan Raihlays Leased circuits Areas along Optical fiberLtd. (33A%) (August 1, 1986) Tokaido, Sanyo, cable

Long distance Tohoku, andtelephone service Joetsu Shin-(September 4, 1987) kansen Railway

Teleway Japan 8.3 Toyota Motors Leased circuits Areas along Optical fibercorp. Corp. (6.0%) (November 11, 1986) the Tokyo- cable

The Highway Ser- Long distance Magoya-Kobevice Facil- telephone service Highwayities Associ- (September 4, 1987)ation (6.0%)

Japan Communi- 15.8 C. Itoh & Co., Leased circuits Nationwide Satellitescations Satellite Ltd. (40%) (February 1988) (Hughes Com-Co., Inc. Mitsui & Co., munications

Ld. (30%) Inc. Ku band)Hughes Communi- tracking,

cations Inc. telemetry,(30%) and command

stationSpace Communlx- 5 Mitsubishi Corp. Lase circuits Nationwide Satellites

cations Corp. (24.5%) (February 1989) (Ford Aero-Mitsubishi Electric space & Com-

Corp. (19.4%) municationsCorp. Ka bandand Ku band)

Tokyo Tele- 10 Tokyo Electric Leased circuits Tokyo Metro- Optical fibercmmmunication Power Co. (November 1, 1986) politan Area cableNebork Com- (48.5%) Long distancepany, Inc. Mitsui & Co., telephone service

Ltd (15%) (November 1987)Mitsubishi Corp.

(15%)

JWe AU of the afnts itd ane mJor Tw I telecommunications carrie. Parentheidcal dates represent strt of opertions. Age braketshdicalte manuactur nd frnquec band

64 Nobugoshi Mutoh

Table 7-3. New Entrants into the International Teleconmmunications Market

Item International Telecom Japan, Inc. International Digital Commwucations

Foundation August 28, 1987 September 22, 1987(July 1986, feasibility study (November 1986, feasibility studycompany) company)

Capital (millions of yen) 1,200 1,200Major Shareholders Mitsubishi Trading (11.48%) C.Itoh Trading (16.83 + 5.00%)&

Mitsui & Co. (11.48%) C&W (16.83%)Sumitomo Trading (11.48%) Toyota Motors (10.00 + 5.00%)'Matsushita Electric (11.48%)Marubeni Trading (7.65%)Nissho Iwai (7.65%)

Application forType I license September 21, 1987 September 30, 1987

InaugurationLeased Circuits April 1989 May 1989Telephone February 1990 October 1989

Facilities satellite cable INTELSAT (IOEt, POR)b INTEISAT ([OR, POR)bTPC-3 (IRU)' NPCH-J-K (Ownership) H-J-K (Ownership)Japan Korea (IRU)'Okinawa Taiwan Cable (IRU)

c&w = Cable & Wireless; H-K-K = Hong Kong-Japan-Korea;: NPC = North Pacific Cable; TPC-3 = TransPacific Cable 3.Note: The table indicates the status at the end of 1987; the situation has changed somewhat since then. International Telecom Japan, Inc.,

and Intemational Digital Communications are the so-called UDD 2s.a. C. Itoh and Toyota are holding Pacific Telesis Intemational's expected share of 10 percent.b. IOR (Indian Ocean region) and POR (Pacific Ocean region) refer to the orbital location of communications satellites.c. IRU = indefeasible right of user.

tions Business Law and were granted on November 30, Type I carriers must be charged at a flat rate. The terms1987. and conditions applying to intemational VAN services

between Japan and the United States are summarizedEntrants into the International VANMarket in Table 74.

MPT announced that it will accept applications forSome of the special Type II carriers mentioned earlier registration of the international VAN carriers from Sep-provide data transmission or international VAN (n1AN) tember 1, 1987, onward. So far ten companies haveservices with foreign countries. International VAN ser- been registered. (See Table 7-5.) Some of these startedvices using leased circuits are, however, prohibited to provide international VAN services at the end ofunder Recommendation D.1 of the International Tele- 1987.graph and Telephone Consultative Committee (ccirr), Bilateral discussions at the govemment level are nowwhich prohibits resale of an intemational private leased going on between Japan and the United Kingdom andcircuit. Special Type 1I carriers have consequently been between Japan and the Netherlands regarding the pro-using KDD's public network to provide such services. visions of similar international VAN services.

In early 1987 the govemments of Japan and theUnited States announced an agreement to liberalize the Current Status of Kokusai Denshin Denwaintemational VAN business over dedicated circuits in bi-

lateral relations. Terms and conditions of this liberali-zation were studied, and some modifications were made KDD was established as a special private telecommunica-to the Telecommunications Business Law to allow Type tions entity under the KDD law in 1953. This law wasII carriers to provide intemational VAN services. The bi- amended a number of times so that the company couldlateral arrangement for the international VAN services meet Japan's changing intemational telecommunica-between the United States and Japan includes two very tions requirements. The latest amendment, just beforeimportant elements: first, services provided by means the adoption of the Telecommunications Business Lawof international VANs must have a value-added compo- in 1985, categorized KDD as a Type I carrier as well asnent, and second, non-tariff-based circuits supplied by a special private company.

Deregulation of Japam's Telecommunications Busimess 65

Table 7-4. Terms and Conditions Applying Table 7-5. International Carriers Operatingto International Value-Added Netvork Services Value-Added Network Services between Japan(IVANS) bethween Japan and the United States and the United Statesfor Special Type ll Carrers Intemational value-

1. The following functions are required for services to be added network camer Corresponding carierconsidered as value-added network services: in Japan in the United states

Network Information Service• Code and format conversion (Marubeni + Tymnet) Tymnet* Protocol conversion Hitachi Information Network* Message store and forward (retrieval type) services (Hitachi) Tymet

2. It is prohibited to provide the following as value-added Japan ENS Corp. (AT&T + IBJ +network services: Mitsui & Co. + KDD) AT&T

NEC GEISCO* Simple resale Global value-added-network* Telephone to telephone (Intec + JAL + Bank* Telex to telex of Tokyo + Tokyo* Facsimile connected to the public switched tele- Electric Power Co.) TelenetMitsui Information Service Computer Science Corp.

(Mitsui) Computer Science Corp.3. Provision of common carriers' facilities (Type I) for value- Nomura Computer System

added network will be on an individual contract basis. (Nomura) NCC-A

4. The intemational network connection must comply with Japan Information Servicethe cciTr Recommendations. (Sumitomo) JAIS-USA

IBM Japan IBMNikkei Shinbun Nikkei Shinbun America

GEISCO = General Electric Information Services Co.; iBi = Indus-Whereas KDD was the sole entity allowed to carry out trial Bank of Japan; JAL = Japan Airlines, Limited; jAIS-USA =

Japan Information Services, Inc.-U.S.A.; Ncc-A = Nomura Corn-international telecommunications business in Japan puter Co.-America; NEc = Nippon Electric Company.under the former Public Telecommunication Law, thisis no longer the case. The two new rivals, ITJ and IDC,which are held mainly by large trading houses, are both reliability at prices that are as economical as possible.users and providers of international telecommunica- In order to realize this goal, KDD has always looked totions services. KDD is now faced with tough competi- the market to determine customer needs and has madetion, especially in the business market. Furthermore, heavy investments to duplicate transmission andthe two companies have the advantage of being able to switching facilities so that the service would be highlyconcentrate their services only in profitable areas, reliable even in the unfortunate event of natural disas-whereas KDD has the obligation of providing universal ters such as earthquakes. KDD was able to reduce ratesservices in accordance with the KDD law. As a result, for seven consecutive years as a result of new technolo-KDD and the new entrants are on quite different footing, gies that cut costs, and it has been preparing to makewith KDD remaining the "flag" carrier, so to speak, pro- further reductions.viding the whole range of telecommunication services KDD went through a major restructuring of the orga-to the entire world. nization in late 1986 to reinforce its marketing power.

As a result of this exercise, the "Account Manager" sys-

KDD Policy in the Face of International tem, designed to respond better to customer needs,Competition was introduced into its sales department.

KDD cannot rely solely on new technologies to reduceprices. The reduction of costs is a key element, and

Although the competition has not yet been realized in KDD is now undergoing a major in-house campaign toJapan's international telecommunications market, KDD cut down all kinds of costs while making big invest-has already begun to prepare for the new environment. ments in areas that are strategically important. In the

It is expected that the effects of competition will be area of new services, for example, KDD continues to de-felt first in the price of services and thereafter in aspects velop innovative and more sophisticated services thatsuch as quality of service, maintenance capability, and can be applied in such a way as to provide its custom-reliability. KDD's corporate policy has always been to ers with offerings best suited to their particular re-provide customers with a wide range of services of high quirements.

66 Nohi Mutoh

Conclusions the International Telecommunications Union (iu), theAsia-Pacific Telecommunity (Anr), the Pacific Telecom-

Since its creation in 1953, KDD has been serving.Japa- munications Council (Prc), and other organizationsnese society as the only international telecommunica- as well as being a signatory member of INTELSATtions carrier with total responsibility for Japan's inter- and the Intemational Maritime Satellite Organizationnational telecommunications services. It has spared no (INMMSAT).effort to meet this responsibility and to keep abreast of KDD is fully aware of the speed with which the mar-the expectations of its customers. This situation will re- ketplace is evolving and of the importance of interna-main unchanged even after the international telecom- tional telecommunications in today's world. The re-munications business in Japan becomes competitive. At sponsibility of world carriers is indeed a heavy one, andthe same time, KDD holds the idea of international har- KDD is determined to fulfill this responsibility whilemony in high esteem because of the fundamental na- working with its partners. In particular, the Asian re-ture of the business, in which mutual understanding, gion represents an extremely substantial market for KDD,respect, and cooperation are required more than in any which is exerting all its efforts to cooperate with itsother type of international undertaking. KDD is contrib- friends in the region to discharge their duty jointly souting to this world telecommunications enterprise by as to facilitate communications among peoples of alltaking an active part in international forums such as nations of this vast and rapidly developing region.

8

Privatization and Reorganizationof Nippon Telegraph and Telephone

Toru Uehara

When the Nippon Telegraph and Telephone Public Cor- ever, many restrictions were imposed on its operation.poration (NTT) was established in 1952, it took over The national government was, for example, involved inresponsibility from the Japanese govemment for pro- its budgeting and in the operation of its business as wellviding the telecommunications services needed for as in determining wage levels, which were set on thepostwar economic reconstruction. It was initially oper- basis of levels prevailing in other public enterprises. Be-ated as a monopolistic public corporation that provided cause of these restrictions, both labor and managementJapan's domestic telecommunications services. For ap- came to feel that autonomous management throughproximately thirty years, Nrr directed its efforts toward privatization would make it possible to meet the pub-realizing the goals of "telephone installation immedi- lic's needs more flexibly.ately upon request" and "telephone communication The need to respond to increasingly diversified de-throughout Japan immediately upon dialing." It has mands in the market, the government's desire for ad-achieved these two goals and has provided a virtually ministrative reform, and the enthusiasm of both N'rcomplete line of basic telephone services. management and staff thus became the major motivat-

Quantum advances in telecommunications technol- ing forces leading to NTr's rebirth as a private cor-ogy, however, have made it possible to provide various poration.other services that integrate telecommunications withdata processing. Coupled with the increased impor- The Situation after Privatizationtance of telecommunications in society, telecommuni-cations needs have gradually become more complex,and demands for these services have multiplied. It has Now that competition has been introduced into the tele-therefore become necessary to introduce competition communications business, the business is divided intointo the telecommunications market in order to meet two types in accordance with the Telecommunicationsthese societal demands. Business Law. Type I telecommunications enterprises

The Japanese government decided to begin by pri- maintain their own telephone circuit facilities and pro-vatizing Nff. This decision came as part of a series of vide telecommunications services. Type II telecommu-administrative reforms carried out under a policy of nications enterprises provide value-added services bytransferring public enterprises to private management. connecting their own switching, communications pro-The reforms were undertaken to improve customer ser- cessing, data processing, and other equipment to cir-vices through more effective management and the in- cuits leased from the Type I enterprises.troduction of basic competition into the telecommuni- Currently, there are four companies in the Type I tele-cations industry. communications business. Using optical fiber cables

Before its privatization, NTT had been authorized, as or microwave radio systems, they started providinga monopoly, to provide basic services within Japan. As leased line services between Tokyo and Osaka late lasta public corporation, it was tax exempt and enjoyed summer. In addition, telephone service was begun ingovermment guarantees in its fund-raising efforts; how- September 1987. There are plans to have companies

67

68 Tonr Uehara

providing leased line services by satellite enter the mar- market. It is therefore rapidly reducing the number ofket in the future. By February 1988 nearly 500 cornpa- its personnel and is reconsidering the efficacy of itsnies had either registered with or notified the MFT of investments in order to achieve better operationaltheir intent to operate as Type 1I carriers. efficiency. In the 1985 fiscal year, for example, it suc-

After privatization, N'rr, having lost its governmient- ceeded in decreasing its total number of personnel bysanctioned monopoly, must conduct business in a basi- about 10,000 persons, and in the 1986 fiscal year, itcally free and competitive market on equal terms with achieved a further decrease of 6,000. These decreasesother private companies. It adopted the following mea- in personnel were achieved without laying off anysures to cope with the severely competitive situation. employees. Rather, they were accomplished by hiring

fewer new employees to replace those retiring andOrganizational Reform by redistributing personnel to newly established sub-

sidiaries.Introduction of a departmental system. NTT began The number of employees assigned to administrative

carrying out organizational reforms, switching its pre- departments, such as at the head office, was greatly re-vious administrative organization, which had been duced, and surplus personnel were placed in front linebased on functions such as sales, planning, and mainte- offices. In this way, NWl is accomplishing an efficientnance, to a departmental system based on type of ser- redistribution of its human resources.vice. This change meant that each department was givengreater authority coupled with greater management re- Establishment of a FYnancial Inrbastructuresponsibility. Each department is thus now able to actwith more flexibility and mobility and can use its own In order to grow, iM must reduce its burden of debtcreativity to meet the goals of increased profits and bet- and establish a healthy financial base. In workingter service. toward these goals, Nrr has succeeded, through cor-

With "people-powered projects" as its theme, NTi has porate effort, in reducing its total indebtedness bycarried out a major reform in the distribution of its about V-400 billion (about US$2.7 billion) in the twopersonnel. Staff are no longer concentrated in its ad- years since it became a private corporation. Nrr must,ministrative offices; now the local telephone and other however, further strengthen its financial base bybusiness offices are considered to be the front line. putting even more effort into debt reduction in the

future.Strengthening of research and development. To de- NrT has been given the highest-level credit rating

velop highly competitive products, Nrr was reorga- (triple A) by both Moody's and Standard and Poors.nized, and each product development section previ-ously affiliated with the laboratories was placed under Changes in Employee Consciousnessthe appropriate business department. At the same time,N'r increased the number of its research institutes With the change from monopoly to competition thatfrom nine to eleven in order to reinforce its basic re- accompanied privatization, employees are increasinglysearch. New centers were constructed for develop- aware that one's own income depends on one's owning network systems and software as part of the innova- work. At the same time, there is a growing spirit of will-tions made in Nof's organization for research and ingness to meet the challenge of competition and andevelopment. increasing tendency to put the customer first.

Separation of the data communications business. Development of New BusinessBecause of the many restrictions and regulations withregard to services and fees, NM's present system is not In addition to the above-mentioned changes accompa-adequate to compete with that of other data communi- nying privatization, Nrr acquired freedom of invest-cations companies. Nil intends to overcome these dliffi- ment. This freedom has allowed it to establish manyculties by creating a separate data communicatiions subsidiaries with flexible operations and to make fullsubsidiary in accordance with Japanese government use of human and material resources and of the diversi-policy. fied technologies and know-how that it has accumu-

lated during its years in the communications business.Increasing Management Effidency Its new businesses are intended to:

NT!' must cope with the severe competition that re- * Expand the scope of NMr's businesssulted from the opening up of the telecommunications * Increase NWr's business activities

Prbattzation and Reorganization of Ntppon Telegraph and Telephone 69

* Respond to requests from outside NW Conclusions* Contribute to the acquisition of know-how, new

technologies, and so forth. As I have shown, privatization has activated NlT's busi-ness. Employee morale has been greatly improved, and

More than 100 new companies, including Nrr Intema- employee attitudes have also been greatly changed. Attional, which conducts overseas consulting and engi- present, I believe, NT= is making very steady progressneering work, have already been established. as a private corporation.

9

New Zealand: From Post Officeto Telecommunications Corporation

Donald R. Murphy

Since about 1985, the New Zealand govemment has de- The New Zealand Post Office was a department ofveloped and implemented a number of economic man- state established by statute. Its operations were subjectagement policies within an overall program of compre- to the direction of the postmaster general, a mem-hensive economic reform. I will refer particularly to an ber of the cabinet. It provided services in telecom-important group of those policies that deal with the munications, mail, and banking and as an agent fortelecommunications sector. A notable characteristic of many govemment functions. It employed 41,000 peoplethe whole package of economic management policies and had assets of $NZ6.1 billion, which includedhas been their comprehensiveness, consistency, and $NZ2.9 billion of deposits with the Post Office Sav-speed of implementation. ings Bank. It was responsible also for policy advice

The objectives of these policies have been stated by and regulatory functions, including radio frequencythe New Zealand minister of finance, R. 0. Douglas, as management.including improvement of living standards, promotion The scope of its activities is indicated by the follow-of a fairer society, development of the individual's full ing financial information (given in thousands of N.Z.potential, and enhancement of personal choice and dollars for the year ending March 31, 1987).freedom. The policies have been developed with a num-ber of considerations in mind: credibility through real- Profitism and public understanding, consistency over time, Revenue Expenditure after taxcompatibility so that policies are virtually reinforc- Government agency 35.6 59.5 -24.5ing and supportive, benefits that are communitywide Banking 409.3 455.0 -51.0rather than specific to one group, and appropriate allo- Mail 322.3 333.4 -13.4cation of responsibility for decisions. Other aims have Telecommunications 1,528.8 1,089.1 327.0been reduction of uncertainty so that people can planfor the future, and promotion of competition and The telecommunications division of the New Zealandflexibility. Emphasis has been on liberalization poli- Post Office provided exclusively throughout New Zea-cies, which are intended to remove unjustified barriers land and intemationally a comprehensive range of tele-to competition and to make it easier for resources communications services, the extent of which the fol-to move smoothly from one area of the economy to lowing figures indicate (figures are at, or for the yearanother. ending, March 31, 1987).

Policies that apply to a number of sectors of theeconomy have been developed that embody these objec- Telephone demand 1.34 milliontives and principles. I will refer to those having applica- Telephones 2.32 milliontion to the New Zealand public sector and especially to Telephone exchanges 828the telecommunications sector, and I will draw on the Inland toll calls 170.9 million127th and final report of the Post Office, namely that International telephonefor the year ending March 31, 1987. calls (outward) 10.2 million

70

New Zealand From Post Office to Telecommunications COwporation 71

The variety of customer premises equipment provided mum number of shareholders to be two, these beingincludes private automatic branch exchange (PABX) sys- the minister of finance, with particular responsibilitytems, telephones, telex machines, and basic and en- for the state-owned enterprise.hanced network services (such as telephone, telex, The shareholding ministers hold on behalf of thetelefax, videotex, packet switching, electronic funds Crown all shares in the enterprises and in this capacitytransfer, telepaging, mobile services, messaging, and monitor the performance of those enterprises by meansdomestic and international leases). The network uses of formal reports, which are prescribed in the legisla-the appropriate current technologies, including dig- tion. These include the usual annual report and state-ital switches and transmission systems and microwave ment of accounts and also half-yearly reports and a re-radio, satellite, and optical fiber linking. Develop- port outlining objectives and strategies, nature andment is directed toward an integrated services digital scope of activities and performance targets, dividendnetwork. policy, and other matters three years in advance,

The New Zealand Post Office telecommunications, known as the "Statement of Corporate Intent." Thesepostal, agency, and banking businesses, together with documents must be laid before the House of Represen-a number of other state trading organizations, were a tatives by the responsible minister.substantial part of the New Zealand economy. They ac- The noncommercial functions, including advice tocounted for some 12 percent of gross domestic product the minister on matters of telecommunications policyand about 20 percent of gross investment. They were and management of the radio frequency spectrum, havecharacterized by confused social and commercial objec- been transferred to another agency of government, thetives, protection from competition, an unconditional Department of Trade and Industry.guarantee by the taxpayer of financial viability, lack of The objectives of the economic reforms introducedinformation on the true cost of operations, limited ac- by the New Zealand govemment included liberalizationcountability for performance, rigid controls over staff- and promotion of competition, the removal of confu-ing and other inputs, and a general lack of autonomy. sion of social and economic objectives, and the separa-

Against this background, the New Zealand govem- tion of commercial and noncommercial functions. Thement instituted comprehensive reform. Effective April restructuring outlined in the foregoing is a significant1, 1987, three new companies were established to re- step in this general direction. Telecom Corporation ofplace the New Zealand Post Office and absorb its staff, New Zealand Limited now has an organizational struc-assets, and systems. They are Telecom Corporation of ture appropriate to its objective, which is, in brief, toNew Zealand Limited, New Zealand Post, and Post Bank operate a successful business that efficiently and effec-Limited. Six other state-owned enterprises were estab- tively provides and operates telecommunications ser-lished on the same date in the areas of airport manage- vices in New Zealand. It is swiftly and purposefully de-ment, coal production, electricity generation and dis- veloping and putting in place strategies to this end.tribution, land, property, and forestry. Capital investment projects are being set in place to

The govemment objective is to provide an environ- expand and modernize the network, with funding fromment that separates commercial and noncommercial normal commercial sources to meet burgeoning de-functions and makes objectives clear. Managers are to mand, particularly from the commercial sector. In rec-have flexibility to manage and may be rewarded for ognition of the importance of good telecommunica-meeting the organization's objectives. Inputs into the tions services for economic growth, customer servicebusinesses, including debt finance, are to be provided and marketing activities directed particularly towardat economic cost. The enterprise boards are clearly the business sector are being intensified. The transfor-accountable to ministers and Parliament for their mation from a government department to a commer-decisions. cial enterprise requires a corresponding transformation

The ground rules for the operation of these enter- in the culture of the organization, and all staff are ac-prises are determined by the legal framework within tively engaged in programs to this end. The same trans-which they are established and by the way in which ac- formation is the driving force for improved corporatecountability for their performance is expressed in the systems, including those for budgeting, revenue man-legislation. Dealing first with the former, these enter- agement, and product financial performance.prises are formed as companies under the New Zealand It will be apparent that, in becoming lean and effi-Companies Act. These companies have certain distin- cient and increasingly sensitive to customer needs, Tel-guishing characteristics prescribed under the new leg- ecom is at the same time adjusting in anticipation ofislation, the State-Owned Enterprises Act, 1986. These an environment in which there may be competition.include their distinctive designation as State-owned en- What, then, is the environment today with respect toterprises and also a provision for the permitted mini- telecommunications competition? In line with the pro-

72 DonaM R. Mwphy

visions of the Telecommunications Act, 1987, the wir- communications networks, and resale of leased cir-ing of residential premises and the supply of telex ma- cuits will continue to be prohibited. On December 17,chines were liberalized on October 1, 1987. On May 1, 1987, the New Zealand government announced its in-1988, telephone instruments and commercial wiring tention to permit competition in telecommunicationsmarkets will be liberalized, with PABxs to follow on network services markets starting in early 1989.April 1, 1989. Telecom is issuing standards for equip- In New Zealand, then, within a compressed timement to be connected to the network, with compliance scale, we are seeing comprehensive structural changetesting to be carried out by independent laboratories. both in the organization that has delivered telecommu-The established machinery of the Commerce Act sup- nications services to the community over the years andported by the Commerce Commission and fair trading in the commercial environment within which it is re-legislation applies to Telecom with respect to its pricing quired to operate. In both these areas, change is an on-and operation in a competitive market situation. going process that will be influenced by changes in the

The govemment has assigned to Telecom the exclu- telecommunications environment in other countries.sive right to establish, maintain, and operate public tele-

10

The Australian PerspectiveMel K. Ward

The telecommunications industry is today undergoing tralia faces many special challenges arising from Aus-a major process of restructuring in virtually every part tralia's topography and demography. Australia is aof the world. This process reflects both structural continent of 7.7 million square kilometers, with a pop-change intemal to the industry and shifts in the ulation of only 15.5 million; it has the lowest popula-industry's external environment. For both telecommu- tion density of developed nations. Virtually from thenications common carriers and national governments start, therefore, the Australian telecommunicationsit opens new challenges and opportunities and also cre- network has aimed at ubiquity-at ensuring that thereates new uncertainties and difficulties. Adjustment to would be telecommunications service wherever therethese changes will require a careful reassessment of the was settlement-and thus at unifying the national ter-objectives and operations of the telecommunications ritory and providing gateways to the wider world. In thesystem-and in particular of the balance between, and development of telecommunications in Australia, thereinterdependence of, goals of economic efficiency and have been three recurring themes: integration, self-the broader role of the telecommunications network as reliance, and infrastructure development.an infrastructure for national and social integration.

These forces are at work in Australia as elsewhere. IntegrationIn Australia, they show significant similarities with thetelecommunications difficulties and challenges faced by Modem Australia began as a penal settlement of Greatother countries in our Pacific region. In this chapter Britain. Its first white inhabitants were "excommuni-I will briefly elaborate on some of the key features, de- cated" in every sense of the word. From this beginningscribe some of the current pressures for change, exam- as an information colony, Australia has developed aine their consequences for policy and for Telecom Aus- communications policy centered on building an eco-tralia as a common carrier, and draw some conclusions nomic infrastructure to support and sustain nationalof more general validity. independence. In the 1870s the task of wiring the conti-

nent involved the pioneering efforts of Australia's over-The Historical Context land telegraph. Today, in the 1980s, Australia has just

completed the first stage of building an optic fiber'highway" that will span the entire country by 1990 and

As befits a large, sparsely populated country of recent provide nationwide access to the digital services of thesettlement, infrastructure policy in Australia has his- future.torically been driven by the objectives of nationaleconomic development and geographical integration. Self-RelianceNowhere is this statement truer than in telecommuni-cations, which-in the 150 or so years of its history- The pioneering communication efforts of the nine-has provided a uniquely powerful means of overcoming teenth century were regionally fragmented and weredistance and breaking down isolation. Telecom Aus- undertaken by a bewildering array of separate public

73

74 Mel K. Ward

and private enterprises. Following federation in 1901, spite the spectacular advances that have been achieved,responsibility for Australian communications was cen- modem technology has done relatively little to bringtralized in the Postmaster General's Department, the these cost differentials down, and even today the mar-precursor of Telecom Australia. International cormmu- ginal subscriber in the typical remote site imposes anications, however, was controlled by the Calble & connection cost twenty or more times greater than thatWireless monopoly over British Commonwealth links. of providing a metropolitan line.World War II led Australia to recognize the country's From the earliest year of this century onward, the"technological nakedness"-its lack of control over ex- principle was adopted of making service available atternal communications, its lack of any local manufac- uniform or nearly uniform prices throughout the na-turing capability in electronics, and its shortage of tional territory despite the enormous disparities intechnical skills. The result was the establishment of the costs. In the context of a govemment-run monopoly,Overseas Telecommunication Commission in 1946 and such a policy could be implemented with little concernprotectionist policies to foster the growth of an equip- for the possible threat of competition. The maintenancement industry. In the postwar period, then, Australia of monopoly power has been seen as essential not onlyconfronted all the questions of sovereignty and relliance so that cross-subsidization can remain viable but alsoon imported equipment and skills that are now re- so that scarce resources can be marshaled and chan-emerging in the context of transnational commtnica- neled effectively to the overriding developmental goal.tions, the issue of international trade in services iin the In short, as with many of the countries of this region,General Agreement on Tariffs and Trade, and the effect Australia has long faced the problem of unifying na-of trading imbalances on national accounts. tional territory and providing an integrated infrastruc-

ture for economic and social activity. The telecommu-Infrastructure Development nications network has played an essential role in this

respect, and the extension of this network throughoutAustralian policy has consistently emphasized the role the territory and the nationwide provision of telecom-of telecommunications infrastructure in supporting munications services at an affordable price has meantgeneral economic development and growth. The public that 92 percent of Australia's households are connectedswitched network from telegraph, through teleplhony, to the fully automatic network. Now, however, new andto packet switched data has been a key factor in re- complex demands are being placed on the telecommu-gional development and the nationwide branch opera- nications systems, and these demands are shiftingtions of Australian businesses. In development ranging the Australian telecommunications system into newfrom the provision of automatic telephony in rural area directions.through digital radio concentrator systems to the pro-vision of nationwide access to packet switched elec- The New Contexttronic fund transfer services, Telecom Australia has un-derwritten long-term infrastructure investment wellbeyond that which the private sector would have under- The forces at work are familiar from other contexts.taken for short-term commercial return on individual Three interrelated factors seem particularly important.projects. As a result of this national policy focus, Aus- The first and most obvious is technology. Rapid techno-tralia is now at the forefront of the world in marketing logical change is revolutionizing the way signals arecompetitive services such as videotext and electronic transmitted and routed and the means by which theybanking. Increasingly Australia is looking to this infra- are processed at either end. The outcomes of this proc-structure to foster an export orientation for its busi- ess include increased speed and greater reliability ofnesses and to support Australia's participation in the service, a substantial upgrading of the intelligence andglobalization of service industries. hence number of functions built into the network, and

In telecommunications, as in other infrastructure, an extraordinary broadening in the range of types ofthis emphasis on national development has imposed data and messages that can be transmitted. The con-significant costs. Despite its vast territory, Australia has sequence is an integration of computer and communi-long had a highly concentrated population, with a ma- cations, shifting telecommunications from a single-jority living in the capital cities of the eastem seaboard. product industry to one serving the increasinglyAs a result, infrastructure costs have tended to be either diversified markets of information processing.relatively low, as they are in the area of dense settle- Closely related to these technological dynamics is thement, or extremely high, as they are in the very thinly growing importance of telecommunications as a basispopulated parts of central and northern Australia. De- for business activity. A rising share of the world's eco-

77T Ausrlan Pmectwt 75

nomic resources is being devoted to generating, pro- tions network. Tightening the constraints on public ex-cessing, and distributing information, a trend that penditure can only reduce public financing-direct orsome observers call "the information economy." This indirect-of telecommunications investment.shift reflects the growing sophistication, diversification, Overall, the pressures on the telecommunicationsand complexity of product and processes and the in- system are increasing. New technologies are creatingcreasingly global nature of markets. These trends mean enormous opportunities to diversify the range of ser-that business, to compete, must cope with a steadily vices provided while steadily expanding the ypes ofgrowing need for coordination and control. Modem in- equipment that can be connected to the network.formation technology provides the key in this respect Users, and in particular businesses, need to exploitand is rapidly changing from being ancillary to a firm's these opportunities to remain competitive in increas-operation to being a major factor in securing and main- ingly integrated world markets, and as telecommuni-taining a competitive advantage. This phenomenon is cations becomes increasingly significant for theirreflected in steadily rising volumes of business expendi- operation, they are becoming progressively more so-ture on information processing and in tum on telecom- phisticated in the assessment and management of thosemunications: the "telecommupications intensity" of services. Govemments, recognizing the rising impactthe Australian economy (the ratio of telecommunica- of telecommunications on economic performance,tions input to business expense) has more than trebled place increasing demands on the common carriers, butover the past decade. real or perceived budgetary constraints limit their will-

As telecommunications becomes a steadily greater ingness to underwrite the spending that meeting thosefactor in business performance, so the pressures the demands would entail.business community places on telecommunicationsproviders are rising-pressures for diversified, more in- The Challenge to Government and Carriersnovative, and more cost-efficient services. What makesthese pressures all the stronger is the evolving eco-nomic environment. The third source of change in the It would be absurd to try to contain the forces fortelecommunications systems is that individual firms change behind a barrage of outmoded rules and regula-and national economies increasingly operate in an envi- tions rather than to adapt our institutions and ap-ronment of slow growth and intensified competition. proaches to new requirements. An important starting

Markets are becoming global at least in part because point is to recognize the persistent need for a high-improved telecommunications are shrinking distances. quality, universally available telecommunications net-In such an environment, a firm can no longer tolerate work. The long-standing goal of providing nationwideinefficiencies arising from a poorly managed telecom- services is no less important in the present context; onmunications system or from an excessively expensive the contrary, it acquires even greater significance asone, for these inefficiencies lead to the loss of market new technologies become a pervasive feature of socialshare and the contraction of opportunities. and economic life.

What is true for individual firms is also true for the A continually strengthened and extended national in-national economy. Thirty years ago, it mattered rela- frastructure is needed to buttress a progressively moretively little whether or not a country had a world-class prosperous society. But the imperatives of differentia-telecommunications network. Today, any country that tion and diversity must also be recognized. To be com-falls significantly behind will quickly find its external petitive, businesses will increasingly require servicescompetitiveness eroded and its attractiveness as a site tailored to their specific situation-to the characteris-for foreign investment diminished. There is a risk of tics of the processes they use, to the products and in-being relegated to low value-added tasks, while more dustries in which they operate, and to the markets incomplex and sophisticated activities shift to countries which they compete. In meeting those requirementsand sites offering advanced information processing and they will want to draw on a broad range of sources oftransmission capabilities. equipment and skills, imposing on those sources strin-

The government therefore rightly insists on the tele- gent tests of customer responsiveness. Success in thiscommunications common carriers' responsibility to market cannot come by forcing the more sophisticatedprovide world-class service at intemationally competi- users' requirements into the straitjacket of outmodedtive prices. But while its demands on the carriers are concepts of 'universal service." It can only come fromrising, the changing economic environment is affecting allowing capabilities to adapt to the emerging patternthe government's ability and willingness to finance the of demand.investments required for a world-class telecommunica- In short, a balance must be struck between the long-

76 Mel K. Ward

standing emphasis on telecommunications as a univer- vides the maximum support for manufacturingsal service and the more recent opportunities and im- and service industries and acts as the "engine forperatives for service differentiation. There are, Ito my growth" in the development of a robust Australianmind, two key elements in this respect: review of the information technology industryframework of regulation and adjustment of the struc- * To ensure that the Australian telecommunica-ture and operations of the traditional common carrier tions industry overall is structured in such a wayto the realities of a more demanding and competitive as to support the competitiveness of Australianmarketplace. businesses intemationally.

In Australia, the minister for transport and commu-nications has initiated a far-reaching review of tele- If increased competition is to achieve its goals, how-communications policy that focuses on four strategic ever, it will need a well-thought-out regulatory frame-issues: work. Competition does not replace regulation; on the

* The nature and extent of monopoly powers contrary, it creates a significant regulatory burden. Inparticular, regulatory powers are needed to distinguishbetween the monopoly and competitive segments of the

* The extent to which private sector involvement market, to prevent the abuse of monopoly power, to en-should be allowed or encouraged sure that competition occurs on a fair basis, to monitor

* The extent to which telecommunications carriers the implementation of broad social and national goals,need to be restructured and relieved of govern- and to set and maintain technical standards. It is im-ment constraints to operate effectively and com- portant that these regulatory powers be exercised in apetitively manner that not only is fair but is seen to be effective,

e The way in which the industry should be regu- and this cannot be done in the long run if a single orga-lated. nization has both regulatory and operational responsi-

Telecom Australia welcomes this review. We believe bilities. A compelling case can consequently be madethat there are many benefits to be obtained from cllarify- for an independent regulatory structure, but it is essen-ing and simplifying the policy framework in which the tial that this structure avoid an excessively legalisticAustralian telecommunications system will develop in and formalistic approach and be capable of workingthe coming years. Competition has, of course, a c,entral with-rather than against-the industry.role, and there can be no doubt that the scope and in- It would be unrealistic to expect any industry totensity of competition in telecommunications will con- make an abrupt transition from a fairly rigid monopolytinue to increase. to a competitive marketplace. The pace of changes

Competition, however, is a means and not an end, must allow the participants in the industry to adjust-and for this means to be efficiently deployed, it seems to adapt what are in many cases deeply entrenched waysparticularly important to meet certain preconditions. of doing things to an entirely new context. GradualTo begin with, competition will not yield socially or change is especially important in the field of human re-economically desirable outcomes if it does not occur on sources, for here the costs and difficulties of adjustmenta level playing field. As long as one of the participants are often greatest. The need to make a transition shouldin the market is weighed down with obligation. that not be an excuse for indefinitely deferring change, how-other participants do not carry, the most efficient or ever; rather, it indicates the need to establish a realisticcost-effective supplier need not be the one who carries and definite timetable for the change process.the day. Given a level playing field, a transparent and efficient

It is therefore essential that-in the transition to regulatory process, and a clear schedule for transition,greater competition-the government clearly set out the ball will be very much in the common carriers'the social, national, and economic goals it expects the court. Ultimately, their capacity to respond to the newtelecommunications system to achieve and ensure that opportunities will determine longer-term viability. Athose who are expected to pursue these goals are di- public owned organization such as Telecom Australiarectly or indirectly provided with the means to (lo so. faces special difficulties in this respect. The web of rulesFundamental objectives for a national telecommtmnica- and procedures characteristic of public administrationtions policy in Australia should be: increasingly conflicts with the efficacy and efficiency de-

manded by a more competitive marketplace. At the* To make the benefits of an efficient and affordable same time, the budgetary constraints bearing on cen-

telecommunications service available nationwide tral govemment all too frequently clash with the need* To see that Australia's investment, past and fu- to plan investment outlays on a multiyear basis.

ture, in telecommunications infrastructure: pro- These issues must be resolved if Telecom is to con-

The Australian PerspectIe 77

tinue to be able to meet the nation's infrastructure Few could deny that there are good grounds for beingneeds. The decision, implemented in 1975, to establish confident of Telecom Australia's potential in its new en-Telecom as a statutory authority separate from the ma- vironment.chinery of govemment departments was a first signifi-cant step in securing greater commercial autonomy, Co Ibut more needs to be done to ensure that what is in onclusionsfact a very large business undertaking can be run asone, albeit within the context of continuing national The picture I have painted is one of change-in tech-and social responsibilities. These changes in Telecom's nologies, in customer expectations, in the pressuresrelationship with govemment must be matched by fun- coming from government, in the organization of Tele-damental change within Telecom itself. Major decisions com as an enterprise. But though change is pervasive,have already been taken in this respect, and their im- we must not lose sight of continuities. First and fore-plementation is now under way. most is that telecommunications is an infrastructure

Telecom Australia is currently shifting from an orga- for social and economic development, an infrastructurenizational structure still marked by the legacy of the that can and should be available nationwide.Postmaster General's Department to one designed for As we rethink our policy approaches and revise ourtoday's market imperatives. The essential element is di- regulatory framework, it is important for us to bear thisvision on the basis of Telecom's different customer infrastructural role in mind. We must indeed achievemarkets: major business, general business, and resi- greater flexibility and responsiveness in our telecom-dential and rural customers. This division involves del- munications system-greater capacity to differentiateegation to autonomous profit centers of the manage- and to tailor service to customer requirements. But itment of costs, prices, and products so as best to meet would serve no one's purpose if pursuit of this goalthe needs of each particular customer group. With the meant that service could not be universal, for even thesetting up of a division responsible for Telecom's larg- most advanced network becomes more valuable with anest business customers, the first steps in this process increase in the number of points it can connect.have now been taken, and others will follow. These Equally, the network decreases in value if it does notmoves reflect the emerging realities of market segmen- evolve in an integrated way, taking advantage of majortation, but what Telecom alone can provide is inter- technological advances.connection-the possibility of communicating with In Australia, we are seeking to reconcile these re-millions of users. Merging the benefits from closer quirements-to provide a service available to all whilesegmentation with those that come from interconnec- ensuring that even the most sophisticated needs aretion will be the crucial task of Telecom's new organiza- met. This concern colors our approach to regulatory is-tional structure. sues. We must steer a middle course between a single-

In short, Telecom is adjusting its policies for prices minded emphasis on competition for its own sake andand costs, for managing technological advance, and for straightforward resistance to change. I mean not to be-greater organizational efficiency. It has now adopted a little the importance of the policy experiments nowfive-point charter for the management of its business: under way in the United States, the United Kingdom,

and Japan but merely to recognize the difficulties in-* To be truly customer driven volved in transplanting this experience to a nation* To be prepared to offer different services to differ- whose infrastructure needs remain large and pressing.

ent customer groups The telecommunications industry is in many ways in* To be driven by the dual imperative of financial the eye of the storm-buffeted by the winds of acceler-

success and service quality ating technology, intensified competition, and rising* To operate through units that can focus on expectations. For people in the industry these are excit-

achievable results ing though turbulent times, and we must be clear* To operate according to the principles of responsi- about our goals and firm in our bearings to ensure that

bility and accountability, which must be taken to the potential of this industry is realized.the lowest level in the organization.

11

U.S. Telecommunications Policy:Increasing Competition and Deregulation

AHenry Geller

Until the end of World War II, U.S. telecommunications vice at lower average cost than two or more firms.policy was based upon the premise that telecommuni- This system of private monopoly, dominated bycations systems were natural monopolies. The guiding AT&T, was not a failure. It provided high-quality localstatute did not specify reliance upon monopoly. The and toll service. Universal service (92 percent penetra-Communications Act of 1934, 47 U.S.C. 151 ancd the tion of telephones) was achieved with substantial directfollowing paragraphs, simply directed the Federal C(on- govemmental assistance through the Rural Electrifica-munications Commission (Fcc), the telecommuinica- tion Administration. AT&T was, in effect, a minigovem-tions regulatory agency, to act in the public interest so ment, taxing its local companies 2 percent of revenuesas "to make available, so far as possible, to all the people to support the national operation, including Bell Labo-of the United States a rapid, efficient nationwide, and ratories' research (where the transistor, the maser, andworldwide wire and radio communications service with so forth were developed), and in tum taxing toll callsadequate facilities at reasonable charges." The thrust of to lower local telephone costs.this charter is to encourage universal service because Today the U.S. system has drastically changed. Theeach added subscriber increases the value of the net- policy thrust, wherever feasible, is to rely upon com-work to other subscribers. Such telephone service binds petition and deregulation (the marketplace). The longsociety together, and the telephone is regarded as a ne- toll routes are thus wide open to competition. So alsocessity for individuals in a society such as that in the is the equipment field. The telephone line is now likeUnited States. the power line, and any equipment meeting the techni-

When the Fcc came into existence, it found in place cal standards for interconnection can be attached. Toa long-established private monopoly, the American facilitate toll competition, AT&T has been divested ofTelephone and Telegraph Company (AT&T), which two-thirds of its previous operations-the local ex-dominated U.S. telephone service. It provided more change companies (called LECs or, in AT&T's case, thethan 80 percent of local service (about 1,600 small Bocs, Bell operating companies). The equipment areatelephone companies provided the remainder) and all (customer premises equipment, or CPE) is deregulatedtoll (long distance) service. It was vertically inte- and left to the marketplace. So also are the activitiesgrated, with Westem Electric, its manufacturing arm, of toll carriers other than AT&T, and efforts are beingdominant in its sector and Bell Laboratories, its re- made to allow the latter more leeway in its operations.search division, far at the forefront of research and The United States is in transition to a much differentdevelopment. This was thus an integrated, end-to- telecommunications landscape.end service (including all the equipment to be attachedto the telephone line). The telecommunications mar- The Causes of Changekets were regarded as natural monopolies, in which,because of economies of scale and scope and theunderlying technology (the paired or twisted ifour- The transition is by no means near completion. Thekilohertz copper wire), one firm could provide ser- process has been halting and not always fanighted and

78

U.S. Telecommunications Policy 79

remains flawed today. Its essential direction has been The Large Usersound, however, particularly when one examines theunderlying causes for the shift. Those causes, although The most important factor bringing about change iscomplex, may be summarized as follows. that large companies make extensive use of telecom-

munications and demand products and services gearedTechnological Change to their special needs with regard to price, efficiencies,

and quality of service. This is especially the case inThere was a drastic change in technology following information-intensive industries such as transporta-World War II. The microwave relay system was devel- tion, travel, banking, and investment. These service in-oped, followed by the communications satellite and dustries reach customers through telecommunicationsthen the photonic revolution of fiber optic cable. The networks linking their offices, airline/hotel/car reserva-computer became a mainstay of telecommunications, tions, automatic teller machines, or computerized cashreplaced the electromechanical switch, and, with registers. These intensively competitive industriespacket switching, permitted much more efficient trans- strive for an advantage or product differentiation in-mission of data streams. Whereas the paired wire made creasingly by customizing a telecommunications ser-competition difficult or infeasible, these developments vice to meet customers' needs. Significantly, industrialopened up toll and other areas to competition. companies are now entering these service-oriented

areas: General Electric derives about one-third of itsThe Convergence of Computers and revenue, and Westinghouse about one-half, from ser-Telecommunications vice-based businesses.

In manufacturing, new telecommunications servicesAs noted above, both the data processing and the tele- allow large companies to increase efficiency by integrat-communications industry were based on the same tech- ing important business functions. Thus General Motorsnological development, the computer. Products and has committed billions of dollars to incorporating theservices developed in either industry could be used in telecommunications and computer networking exper-both. Since the data processing industry is fortunately tise of Electronic Data Systems (EDS) and Hughes Air-not regulated, it can respond quickly to the dynamic craft Company into its manufacturing and marketingtechnology in the marketplace. The telephone industry structure. A further example is the "just-in-time" deliv-similarly called for such fast response, but it was sub- ery service technique, developed first in Japan, whichject to regulation: government permission had to be is now extensively used to reduce inventory costs forobtained before a new product or service could be intro- manufacturers; such service requires customized tele-dliced, and there was both protection and limitation as communications networks to monitor inventories andto the return on the venture. The convergence factor schedule shipments.clearly forced telecommunications policy in the direc-tion of competition and letting go. The Winds of Deregulation

New Entrants and Vendors In the 1970s the winds of deregulation were blowingthrough the U.S. economy. Thus there was a national

Although the foregoing technological considerations spotlight on industries such as airlines and trucking,made competition feasible, it took new entrants and which had been under close governmental regulation.vendors to seize upon the opportunity-and they did Even though the telecommunications industry differedso. Some, using microwave initially, wanted to compete in important respects (for example, it had an en-in the area of toll services. Others wanted to intercon- trenched and dominant player and large sunk costs fornect new products to the telephone network. Still oth- equipment that is not mobile as are planes or trucks),ers wanted resale access to the telephone network for it was natural for the competition/deregulation focus totheir value-added services-primarily to provide com- shift to the telecommunications sector.puter communications by, for example, supplying atransparent interface for interconnecting computer The Slippery Slopework stations or using other data processing tech-niques. Some entrants were small, but many were With the advent of the microwave and other technol-large companies (for example, International Business ogy, policymakers showed a natural tendency to allowMachines, or IBM). They formed a powerful coali- some carefully tailored entry so as to meet the needstion for change, particularly when linked to the large of large users and ventures seeking to serve those usersuser. (for example, private networks and private line ser-

80 Henry Geller

vices). But at least on the basis of U.S. experience, such trants that are not necessarily more efficient butmarket segmentation does not work; the conditions that undercut the services being used for the sub-erode over time-and little time is needed--with sidy (in this case, the toll services). Such a systemthe result that the entire area becomes open to com- skews use at both ends, discouraging full and effi-petition. cient use of toll services (thus cutting against the

above main goal) and encouraging overuse at theGlobal Competition: The Need for Maximum local level. Whatever the prospects for competi-Producftvity tion at the local level, it cannot develop fully in

such a distorted environment.Global competition has become important in the last * Because maintenance of universal service is stilldecade and, in my view, is now the dominant factor. a national goal, it is important to target subsidiesIndustries in the developed countries are now engaged to those that need them in a way that does notin global competition. To win in this fiercely competi- skew the competitive picture.tive new environment, industry must strive for rnaxi-mum productivity. Telecommunications is of course no With this introduction, I now consider the U.S. tele-panacea, but as indicated above, it can contribute sig- communications scene sector by sector.nificantly to improved productivity-to competitive-ness. Government policy must foster a maximum con- Customer Premises and Network Equipmenttribution by telecommunications to industry and to theordinary consumer. In other words, it must allow thetelecommunications industry to respond quickly to the "Customer premises equipment" (CPE) is a generic termdynamic technology by introducing new services and that includes telephone handsets, key telephone sys-products in the marketplace. tems, private branch exchanges (PBXs), and so forth. As

The chief policy principles needed to achieve this previously noted, for decades the carriers in the U.S.goal are well established: system offered end-to-end communications service and

. Competitio shoul berelieduponwhereveirfea- thus were the sole providers of equipment attached to*Competition should be relhed upon wherever fea- q .the telephone line. In a series of decisions (the 1956sibce. Cmetitio S,ater al the nrmal ap- Hushaphone decision, the 1968 Carterphone decision,proach in the U nd s.trs prices to- and the 1977 Certification ruling), the Federal Commu-ward marginal costs and spurs efciencies an nications Commission (FCC) opened CPE to all providers

who met the requirements for the technical integrity• "Regulated competition" should be avoided be- of the telephone system. In 1980, in the Computer In-

cause of its obvious drawbacks: the full benefits of quiry H decision, the Fcc deregulated the CPE area. Thiscompetition (or for that matter monopoly) are not ruling recognized that CPE could readily be separatedobtained when the government closely supervises from the underlying utility service and that it made nothe process, all too often handicapping the players sense to regulate one-half of a fully competitive area.in order to preserve competitors instead of pro- Previously, IBM could introduce a hybrid product, IBMmoting all-out competition. (The governmnent, 3270, and win or lose in the marketplace, whereashowever, has plenty of encouragement in this DataSpeed 40/4, the same product marketed by AT&T,area because, as Senator Magnuson remarked, "All was subject to the full panoply of regulation (permissioneach competitor seeks from government is a fair to enter the market and regulated return).advantage over its rivals.") There have been great benefits from this wide open

* Nevertheless, because monopolies do exist (for ex- competition. Now 20,000 types of CPE are registered inample, the LEcs), it is important to regulate in a the United States by more than 900 manufacturers,fashion that promotes the above goal as much as with 2,000 firms marketing CPE nationwide. Sales to-possible and yet protects the monopoly rate payer taled about $14 billion in 1985, up from $12 billion inand the competitors of the LEcs who depend upon 1985. At the low end of this market, the telephoneits monopoly (bottleneck) facilities. This is no handset accounted for about $1.4 billion in sales ineasy assignment. 1985 and was available to the consumer in a wide vari-

* The subsidies existing in the system should be ety of forms (from the very cheap and unsophisticatedeliminated or very largely reduced. A competitive to the expensive, with "bells and whistles").system that maintains substantial subsidies is giv- Key systems are more sophisticated, multiline busi-ing off false economic signals, which attract en- ness communications installations, which bridge the

U.S. Telecommunications Policy 81

market between single-line, chiefly residential custom- information services activity: adjunct or auxiliary com-ers and the larger communications users with sufficient munications offerings (for example, voice storage andtraffic to warrant installing a PBX. Key system sales in forwarding, electronic mail, telephone traffic manage-1985 were about $2.5 billion, up from $2.1 billion in ment, and interactive computer communications ser-1984. Because of the open and fierce competition, there vices such as computer bulletin boards); offerings suchhas been a 50 percent drop in prices for such systems as remote access to data banks and computer informa-between 1981 and 1985. Prices fell 15 percent per line tion services and transactional services such as creditin 1985 (from $280 per station in 1984 to $220 per sta- card verification; and the distribution of news, informa-tion in 1985). Prices are further projected to drop from tion, and entertainment (for example, videotext ser-about $225 per station in 1985 to about $160 per sta- vices such as Prestel, Minitel, or Bildschirmtext).tion in 1989. The FCC in its 1971 Computer Inquiry I decision

The PBX is the most commercially important and sought to regulate carriers supplying such services iftechnically sophisticated part of the CPE market. There the transmission rather than the enhanced elementare about 240,000 PBXS installed in the United States predominated. It found that drawing such a line (be-today, and the market has been growing at a rate of tween predominantly transmission or predominantlyabout 15 percent compounded each year ($3.4 billion enhanced) was simply not feasible in light of the tech-in 1985). This growth has been stimulated again by the nology. Therefore, in its 1980 Computer Inquiry MI de-all-out competition and consequent improvements in cision, it deregulated the area of enhanced services.efficiency and drop in price (a 30 percent drop between Furthermore, in its 1986 Computer Inquiry III ruling1981 and 1985). it again sought to promote such services by the divested

The policy of competition and deregulation has been BOCs. This remains an unfinished policy area in themarkedly successful in this area. With the changeover, United States, however, because of the unusual processthere has been some confusion among residential sub- followed (that is, the dominance of judicial, or anti-scribers, especially with regard to maintenance. With- trust, considerations).out question, however, there have been great benefits The more than 300 vANS in the United States makein prices and innovation and few drawbacks. a significant contribution to innovative uses of the tele-

The area of network equipment has understandably communications networks. The largest is GTE Telenet,not engendered such all-out competition. AT&T re- with Tymnet second. Enhanced service providers repre-mains dominant in the long-haul transmissions sys- sent a relatively modest share of the enormous U.S. tele-tems market and installs its large No.4ESS toll switches communications market and have no assurance of(capable of handling 107,000 terminations and 600,000 quick or large success. But their potential is great-call attempts); 105 such switches are installed in so- estimated to be about $6 billion in revenue in the earlycalled class 1 to class 3 toll switching centers, and the 1990s.firm plans to have a total of 200 by 1990. Its competi- A growing value added service is the local area net-tors purchase large switches from other suppliers. work (LAN), used to connect offices or data processing

There is greater competition in the market for centers; LmNs vary from simple copper connections tosmaller, local service switches-central office machines broadband fiber optic packet switching arrangements.with a capacity of between 10,000 and 70,000 lines. L&N sales in the United States were $540 million in 1985Several large manufacturers compete for the LEc or BOC and are expected to reach about $1 billion by 1990.business here, with the result that prices have steadilydeclined from $1,000 to $300 or less per line over thepast four years. AT&T and Northem Telecom have gar- Transmission Services Long Haul Tollnered the bulk of sales in this area.

As noted, new technology such as the microwave orValue-Added Networks communications satellite made competition feasible.Neither the Congress nor the Fcc held an overall pro-

ceeding in which it was determined to shift from mo-Value-added networks (VANs) add value or "enhance" nopoly to competition. Instead the FCC moved in slowcommunications systems through data processing and gradual steps to introduce a small element of com-techniques (for example, by effecting protocol and code petition to meet the needs of the large user better. Inconversion or voice storage and forwarding). Examples 1959 it allowed large users to construct their own mi-of such enhanced services are set out in the appendix. crowave networks to meet their own long distanceThere are three broad categories of such enhanced or needs. Later, in 1969, it authorized the first competing

82 Henry Geller

toll carrier, MCI, to provide private line services, again rise, and their pressure has halted the process short offor large users, and in 1971 it generally permitted spe- its complete goal. Although substantial progress hascialized common carrier toll services (called other com- been made, there are still significant subsidies in themon carriers, or occs) to enter the market. In 1972 it system. I believe this to be unfortunate. The Unitedadopted an open skies policy for domestic common car- States has wisely opted for competition and will not ob-rier satellite operations, permitting all financially and tain the full and true benefits of competition-the effi-technically qualified parties to launch private line satel- ciencies and improved productivity-with a system stilllite services. somewhat skewed by significant subsidies. (Subsidies

The Fcc believed that it had confined competiticin to are appropriate for those who could not otherwise af-the private line services, which represented less than 2 ford telephone service, but the best way to target suchpercent of AT&T's revenue (the bulk of the revenue was people is through welfare payments. What is not neededfrom message toll service, MTS, and wide area telephone is a subsidy for the rich or middle class.)service, WATS). Thus it thought that there would be no With the breakup of AT&T and equal access, the occsundermining of the basic toll system and that the sub- have undertaken large construction programs. AT&T insidies flowing from toll to local services could con- 1984 had an estimated in-service transmission capacitytinue. As I have noted, however, this actually tumed of about 987 million circuit miles. It increased to aboutout to be the proverbial slippery slope: competitors 1.03 billion circuit miles in 1985. The competing occsmaneuvered to enter the forbidden areas (MTs), were in 1984 had an estimated 1.19 billion circuit miles ofsustained in court, and in less than a decade (that is, in engineered capacity, about 20 percent more than AT&T.1979-80), the entire long haul toll area was opened to occ capacity increased to about 1.7 billion circuit milescompetition. by the end of 1985, about 64 percent more than AT&T.

During the 1970s AT&T waged all-out war against the Much of this rapid increase was due to the installationnew occ competitors, using all the weapons in its arse- of substantial fiber optic transmission capacity.nal (for example, price reduction and administrative or AT&T has stated that it will have, by the end of 1989,court challenges). It especially sought to take advan- 24,000 fiber route miles in place, compared with 11,000tage of its control of the local exchange facilities (Bocs), in 1987. U.S. Sprint estimates that it will have 23,000which the occs needed in order to complete their toll route miles of fiber in place by the end of 1989, whereascalls. AT&T refused interconnection to the occs, or de- MCI, the other large U.S. facilities-based toll carrier, in-layed such service, or offered inferior interconnection. dicates that it will have more than 10,000 route milesAs a result of these practices, the U.S. Department of of fiber in place by the end of 1987, up from 5,000 atJustice instituted an antitrust suit in 1974 against AT&T the end of 1986.and in 1982 obtained the relief it sought-the divesti- The Fcc does not regulate the rates charged by theture of the BOCs, the essential "tails" needed by AT&T's occs because they have no market power (MCI has 10rival to compete successfully in long haul toll. The BOCs percent of the market, and U.S. Sprint has 4 percent).thus became independent and are now organized in It has continued to regulate AT&T, which garners aboutseven separate regional companies (RBOCS). They were 80 percent of the long haul toll revenues. The Fcc, how-directed to afford the occs access to their facilities ever, has recently proposed to change from the slowequal to that given AT&T, and this process is now more "cost-plus" process of rate of return regulation to onethan 70 percent completed. of price caps on AT&T'S basic services.

With the advent of full toll competition, the Fcc In light of AT&T'S dominance, it is not clear at thismoved to wring the subsidies out of the toll system. time just how competition will work in this area. Possi-This step would have been too disruptive if taken bly AT&T will continue to dominate and will in effectabruptly on a flash-cut basis, so the Fcc proceeded grad- run a cartel similar to that of U.S. Steel during the firstually. Each year, starting in 1985, all subscriber lines half of the century, maintaining "umbrella prices"were assessed one dollar so that the non-traffic- under which its rivals shelter. The advantage to AT&Tsensitive costs of the system (that is, the loop running is that it escapes regulation or re-regulation. Signifi-from the subscriber to the local central office and the cantly, however, the capacity will not disappear and willswitch dedicated to the subscriber in that office) were be available for resale at least. This is a substantial com-placed directly on the cost causer rather than being petitive plus.covered largely by a surcharge on the toll caller. Local Most important, large users have benefited greatlyrates thus went up gradually, with toll rates coining from the competitive/deregulatory milieu. They havedown correspondingly. Each dollar represents some- constructed their own networks, using microwave,what more than a billion dollars in cost shifts. fiber, or satellite; made use of the competing carriers;

Politicians do not like the idea that local rates will brought on sophisticated equipment; and so forth.

U.S. Telecommuzications Policy 83

Local Competition com: basic services of the greatest concem to the regu-lator (for example, residential rates) are specified and

Short haul toll competition (called intra-LATA [local indexed to the retail price index minus a set numberarea transport and access) toll) presents a different pic- of points (or the average productivity gain in the indus-ture. Such service represents 23.8 percent of toll reve- try). This approach has considerable difficulties-defin-nue (about $14 billion), and there is virtually no com- ing the basic service, setting proper beginning rates,petition to the LEcs. There are legal barriers to entry determining the appropriate period of the contract, en-(that is, states such as California forbid it), and in any suring quality standards, and so forth. Its proponents,event, even where entry is allowed, it is blocked by the however, argue that everything in life is relative andlack of equal access. Indeed, an LEC has charged its ri- that this system works better than rate of return. Fur-vals more for access than its own end-to-end toll thermore, it reduces the threat of improper cross-charges. It is not certain how effective competition can subsidization because the LEC or BOC cannot gain bybe in this area, but clearly it should be allowed and on imputing costs to these basic services that have pricesfair terms so that the market can decide the issue. thus fixed.

Some niches of competition occur in local exchange In New York, the LEC's rate of return will vary consid-and access services. The large user can bypass the LEC erably over the next several years, thus giving it an in-by constructing its own access facilities to the long dis- centive to be as efficient as possible, with both it andtance carrier or by obtaining special access facilities the rate payers sharing the benefits of such efficiencies.from a carrier. This kind of bypass is relatively infre- These and other approaches may be flawed and shouldquent, especially because the LEC has become its own perhaps be discarded or substantially revised. It is mostbypasser and affords the large user special access in helpful, however, to have different states try differentorder to retain its business, albeit at a reduced profit. methods and prove them out one way or another.There is some competition, chiefly in data transmis- Finally, there are the problems created by the judi-sion, from the institutional networks of cable tele- cial decree entered in 1982 when the BOCs were di-vision systems or from digital termination systems. vested. Because they are monopolies, they were putCompeting fiber optic loops, teleports, "smart build- under three restrictions: no entry in long haul toll ser-ings" (shared tenant services), and so forth also have vice because they owned the essential "tails"; no manu-niches in very large core markets such as New York or facturing of telecommunications equipment; and noChicago. entry into the information (enhanced) services, again

These developments, however, are tiny compared because of their possession of "bottleneck" facilitieswith the revenues of the LEC or Boc local network. This upon which information providers depend. In a recentubiquitous local network is the source of LEC power; it order, permission was granted for the BOCs to constructis the only way to reach the small business or the resi- and operate a sophisticated network infrastructure thatdence and, because of its switched, ubiquitous nature, will facilitate the transmission of information servicesremains the mainstay of even the largest user. Nor is (for example, videotext) originated by others.there any development on the horizon that will under- I believe that the restrictions on BOC entry intomine its strength in this century-not cellular radio or equipment manufacturing and information services arecompeting fiber optic networks. Digital radio may be a poor policy and conflict with the driving technology. Itsolution but not in the next decade. The other devel- is a mistake to keep half the U.S. telecommunicationsopments-fiber optic use, open network architecture industry out of these important areas. Like AT&T and(ONA), and the integrated services digital network-all GTE, the BOCS should be in manufacturing (where theywill enhance the transport monopoly, not diminish it. can contribute to R&D) and in the business of informa-

In other words, it remains necessary to protect the tion movement and management. Information servicesmonopoly rate payer. In the United States, the states are difficult to establish successfully, and the BOCs haveare charged with this responsibility, and they are acting the resources and expertise to make a contribution.commendably as laboratories. Several have concluded There is no way to forecast what that contribution maythat rate-of-return regulation, with its long hearings be-such is the genius of competition-and it is there-and often "guesstimates" on a stale record, does not fore wrong to suppress it. When we look back at theserve the public well in the new atmosphere. It is a end of the century on divestiture, the great plus willcost-plus approach that will not sufficiently spur the de- be not in toll competition but in having cloned AT&Tsired innovation and efficiencies. seven times-in the pluralism that comes from the in-

One state (Vermont) has therefore tumed to the so- dependent strategic planning of these large companiesciaW contract, a compact similar to that used in Great ($16 billion to $24 billion in assets). The judicial decreeBritain to deal with the recently privatized British Tele- today undermines this all-important benefit.

84 Henry Geller

Although on balance the nation and the consumer The FCC and the state agencies have thus had to mud-would benefit from BOC entry into manufacturing and die along, without overarching policies set by Congress.information services, there would certainly be the need Worse, the field has been split between the FCC and thewith such entry to ensure fair competition in light of antitrust court. The FCC, for example, believes that BOCcontinued BOC control of bottleneck facilities. The FCC entry into manufacturing and information services willis engaged in ensuring fair interconnection to the com- markedly serve the national interest and is endeavoringpeting information provider and preventing improper to foster such entry, which would be accompanied bycross-subsidization. It has tumed from the use of sepa- new forms of access to basic elements of the monopolyrate subsidiaries for the competitive service to account- network (for example, ONA). Its efforts, however, areing procedures and, in the short term, comparably ef- frustrated by the antitrust court's position on thesefective interconnection (CEI); that is, when the BOC same issues. This is an extraordinarily poor way for aseeks to enter an information service, it must demon- nation to proceed. It appears, however, that the flawedstrate that it will afford rivals equivalent access to its process will continue for several more years at least.facilities. In the long term, the FCC seeks to foster "opennetwork architecture" (oNA), an unbundling of the Conclusionsbasic elements of iocal service. Unlike CEI, whichi is aspecific interface for a specific service, ONA is a generalinterface that will allow the BOCs to introduce new in- In discussing the transition process, I have necessarilyformation services much more rapidly. oNA will also aid oversimplified. Indeed, it may be wrong even to use thecompetitors because they will be able to make use of term 'transition." In the United States, there has beenit without first having to disclose details and plans to transition to true economic deregulation of airlines:the BOC (and thus without losing any head start). OKA, the Civil Aeronautics Board, the U.S. regulatoryhowever, appears to be a complex, difficult development agency, no longer exists. There is no such prospect inthat should come gradually in the marketplace in re- the case of telecommunications. The LECs certainly ap-sponse to demand and evolving technology. pear to be monopolists who will be candidates for regu-

BOC entry into manufacturing and information thus lation, albeit much revised, for the rest of the century,remains a confused issue and subject to ongoing strug- if not longer.gles in the Congress and the U.S. courts. The United I believe that in spite of the difficulties and flaws inStates certainly cannot be said to have its house in the process, the United States is moving in the rightorder in these important respects. direction. Significantly, other nations, such as Japan

and Great Britain, are gradually moving in the same di-The U.S. Process rection. The reason is the large benefits to the nation

that increased efficiencies in telecommunicationsbring. The United States should therefore press ahead

Another flaw in the U.S. process for formulating tele- in implementing the principles that I have discussed ascommunications policy is that the guiding statute, the rapidly and fully as possible.1934 Communications Act, has remained unchangeddespite the enormous upheavals in the industry. Thatit has done so is certainly a testimonial to the Act's flex- Appendix. Examples of Value-Addedibility, which stems from the use of general standards and Information Services(for example, public interest; just and reasonable rates) Value-Added Servicescombined with broad rule-making powers. It also re-flects adversely upon the Congress, however. After allthere were and indeed still are telecommunications pol- The following examples tend to be considered value-icy issues of the greatest importance to the nation (for added services. They are either currently traded or are

examle, ssus ofmonpolyverss cmpettio, susi- considered potentially tradable and are suggested as ap-example, Issues of monopoly versus competition, subsi- propriate activities for inclusion in international con-dies and universal service, the interface between mo- srltate tiesoruicluion ieraioacnnopoly and competitive services, the regulation of mo-nopoly in a changing competitive environment,, and 1. Electroni mail. Messages sent from party A tojurisdictional disputes between the FCC and state regu- party c be intrduce int tstm by cus-latory agencies). Congress held hearings year after year e arty B, ing ts custon these issues but found itself unable to pass legisla- tomer terminal A. Party B, using its customertion that would give guidance to the regulatory agen- premises equipment (CPE), may periodicalb inter-cies and certainty to the industries involved. rogate the service to determine whether any mes-

US. Telecommunications Policy 85

sages for B are being held. If so, B may retrieve capabilities. Software-generated instructions per-these messages at will for readout on a video dis- mit and facilitate the exchange of data betweenplay terminal or similar device. This service and among once incompatible communications

networks and computing equipment.* Combines communications channels and

data storage devices Infonnation Services* Enhances the original message that has

been sent through the system by storing it 1. Remote access data processming. This service al-in the network lows a CPE to interact with a remotely located

* Is predominantly nonvoice. computer via common carriers communicationslink, usually over the public switched network.

In the United States, Telemail (by CTE) uses a GTE Data processing services include processing func-public data network that lets the user compose, tions such as (a) general purpose programmingsend, and read messages; file messages; and send andnsroram exection,nusal unde useracon-

the ame essae toanynumbr ofpeope attheand program execution, usually under user con-thesame message toany number of people atethe trol; (b) special purpose numerical data pro-same time. The client uses a portable terminal cessing for accounting and other business appli-that connects to the public network via a conven- cations; (c) word processing; (d) proprietarytional telephone. information retrieval services; (e) automatic type-

2. Voice mail. Message and storage service, the tele- setting; (f) systems design and programming; andphone equivalent of electronic mail, (g) programming, turnkey, or integrated systems,

which combine all of the above.* Combines communications channels and 2. Online data base services. Data base services in-

storage devices clude electronically published, machine-readable* Provides the capability for voice messages to information and related information services such

be stored (until the paying customer calls it as print or microfilm publishing. The firm pro-up) and forwarded ' vides a custom research service on its own data

* Is predominantly voice. bases. The most significant new use of basic trans-

3. Protocol conversion. This service permits com- mission services has been for data transmissionmunications between customer premises equip- by, for example, banks, retail stores, and airlines.ment operating on different protocols, for exam- Today 1,800 data bases are available in the Unitedple, between a personal computer (which usually States, as compared with 362 in 1977.operates on an asynchronous protocol) and a host 3. Videotex. This is a generic term for a two-way in-computer operating on X.25 protocol. "Protocol" teractive service combining a customer premisesrefers to the highly formalized ground rules that query device, such as a typewriter keyboard orpermit two interconnected data terminals to initi- touch-tone pad and a video display, such as aate the communications process, effect the infor- home television set, that are linked by the publicmation transfer, and terminate the communica- telephone network to a computerized data banktions process. If the built-in protocols of the two or other information source. A subscriber could,terminals differ, communications between the for example, use Videotex to query the informa-two cannot take place. tion in a retail sales catalogue or to have banking

4. Packet swvitching. Packet switching is a switched services delivered to the home. Videotex providesdata communications service in which a data data storage, retrieval, and processing.stream is subdivided into so-called packets (typi- 4. Data networks management and operation.cally composed of approximately 200 characters) Management and operation of data networks bythat are separately routed to a destination. At the personnel other than those of the companycalled party destination, the packets are assem- concerned is a new, and rapidly growing, telecom-bled to reconstitute the original message. Packet munications service that may be offered inter-switching requires some storage and forwarding nationally.

I

Part III

The Experience ofDeveloping Countries

12

Beginnings of Sector Reformin the Developing World

Bjorn Wellenius

What is the situation of telecommunications in the de-veloping countries generally, and what are the con- Figure 12-1. Drivng Forces and Sector Changestraints on sector development? In the following pagesthese questions are addressed and the new sector solu-tions to overcome the constraints are outlined. Brief Increased Globalizationexamples of beginnings of sector reform, or at least evi- information _ of economic Technologicaldence of pressure for change, are presented for twenty- intensity activity innovationseven developing countries. Figure 12-1 summarizesthe main driving forces and resulting changes.

Telecommunications in Developing Countries Rapid growth anddiversification

of user demandsDeveloping countries invest about US$8 billion to US$9billion a year in public telecommunications, or about0.4 percent of gross domestic product. Telephone ser-vices (local, long distance, and international) typically Sectoraccount for more than 90 percent of the sector's invest- policy reformsments and revenues. Other public telecommunicationsservices include telex, telegraph, and, increasingly,some forms of data transmission.

Sector Characteristics inct vemore |/ between \ of worldwd

The various countries show major differences in per- players users and marketsformance, growth prospects, absolute size, and size rel-ative to population. Still, certain basic characteristicsprevail almost universally in the developing world.

Public sector role. Telecommunications services indeveloping countries are usually provided by the public cetisearchnsector: government departments, semiautonomous ngwbusiboards, offices or directorates, or public or parapublicenterprises. These entities have the monopoly on tele-communications services. Often the same entities that

90 Bjon2 Wellenius

provide the services are also responsible for govem- demand. Outstanding applications for telephone con-ment policy and regulatory functions, including the li- nections often exceed the number of lines in service.censing of private networks and the administration of New applicants typically wait several years before ob-the radio spectrum. taining a connection. There is heavy call congestion at

all levels of service, particularly during business hours.Retum on investment. Telecommunications invest- In Peru in 1983, for example, only 40 percent of the

ments yield high retums to the economy as a whole. total conservatively assessed demand for telephone con-Ten recent development programs for the telecommu- nections was met; in Lina, the capital city, less thannications sector that were partly financed by the World 55 percent of local, 35 percent of long distance, and 10Bank in Africa, Asia, and Latin America, for example, percent of international call attempts were completedare conservatively expected to average 18 percent eco- (compared with a minimum of about 75 percent in de-nomic rate of return, or about 37 percent when soime veloped countries).consumer surplus is included. Furthermore, services tend to be mainly concen-

Telecommunications services are used mainly for trated in one or a few large cities or towns. About 70economic purposes. In Thailand in 1980, for example, percent of Brazil's telephone lines in 1985, for example,62 percent of telephone lines were connected to busi- were in cities that accounted for only 20 percent of theness and government subscribers, 90 percent of which population. In Thailand in 1981, 89 percent of tambonswere engaged in communication-intensive sectors of (administrative subdistricts), with 75 percent of thethe economy (trade, finance, transport, communica- country's population, had no telephone. In most devel-tion, utilities, other services, and government adminis- oping countries, the more advanced services increas-tration). About 90 percent of telephone calls and reve- ingly required by the modem sectors of the economiesnues (including about 50 percent of those from are largely nonexistent.residential subscribers) related mainly to productive Underinvestment is also indicated by the users' will-and distribution activities of the economy. ingness to pay prices well in excess of tariffs to obtain

Where available, telecommunications services beiie- or retain service. In Turkey in 1984, for example, aboutfit a broad cross section of population. About 62 percent 40 percent of new telephone subscribers officially paidof Guatemala City's residential telephones in 1984, ifor between US$600 and US$900 (rather than the basicexample, and 78 percent of those in Montevideo, Uru- US$100 connection fee) to obtain service in about sixguay, in 1980 were in middle- and low-income homes. months instead of the past average nine years; exist-Thirty-three percent of public telephone callers in rural ing lines were said to be privately transacted for upCosta Rica in 1974 were agricultural workers, 24 per- to about US$2,000. Offices and homes with telephonecent businessmen, 23 percent professionals and techni- in Cairo, Egypt, in 1977, commanded rental pre-cians, and 6 percent nonagricultural workers. miums equivalent to about four times the telephone

With appropriate pricing and investment policies, rental, compared with similar properties withouttelecommunications can also be a profitable business. telephone.The ten investment programs mentioned above are ex-pected to average about 19 percent intemal (financial) Efects of U hderbes nentrate of return. The enterprises average about 14 percentannual rate of return on net revalued assets. Actual re- Inadequate telecommunications reduces efficiencyturns are often higher. throughout the economy, diminishes the effectiveness

Telecommunications can also be an important of investments in priority sectors and development pro-source of public funds. In Morocco, for example, the grams, causes a comparative disadvantage in trade andtelecommunications sector is expected to transfer to in attrcting investment, and lowers the quality of lifethe government in 1987-94 the equivalent of about in terms of personal access to emergency services andUS$2.1 billion, or 60 percent of gross revenues, mainly communication with kin and friends. In Uganda inas value-added tax, income tax, and import duties. The 1983, for example, because of inadequate rural and pro-Brazilian telecommunications system contributed to vincial teleconununications and postal services, trucksthe govemment in 1986 almost US$800 million, or 31 collecting coffee and cotton from a large union of co-percent of gross revenues. operatives made trips estmated to be 20 percent in-

effective; also, about 200 workyears were wasted in oth-Chdernneshnent. Despite these high social and pri- erwise unnecessay administrative bMel by senior

vate returns, developing countries are characterized, goverment officials. Rural callers in Papua Newwith few exceptions, by major underinvestment in tele- Guinea in 1977 raeled on aveage about seven kilome-communications, as is evident from the large unmet ters to reach a telephone, 7 percent trveled more thn

Begnrmgs of Sector Reform in the Developing World 91

twenty-four kilometers, and several were known to ganizing the telecommunications entities as indepen-have walked about two days and then to have taken mo- dent boards or directorates and giving them moretorized transport to reach a telephone. control over operating surpluses-within the limits of

As service develops, significant economic gains the public/parapublic sector, however. Availability ofoccur. The introduction of long distance telephones in funds for investment has been increased somewhat,the Amazon region of Peru in the late 1970s resulted largely through higher tariffs, external borrowing, andin substantial cost savings and increased revenue in aid. Domestic telecommunications manufacturing inriver transportation; in another region in 1983, the use some countries has reduced the sector's foreign ex-of telex for reservations increased average hotel occu- change requirements. Training and technical assist-pancy in a tourist town from less than 50 percent to ance has improved the enterprises' organization andabout 70 percent. In Sri Lanka in the 1970s, telephone management.access to market information allowed farmers to place These efforts have had mixed results. Several coun-their produce at 80-90 percent of Colombo prices, as tries (particularly in Africa) accelerated telecommuni-compared with 50-60 percent before; in the 1980s, Co- cations development and appear to be catching up withlombo food merchants relied on the telephone and telex other, less neglected infrastructure. A few countriesfor operations in intemational markets. maintained record high growth rates of telecommuni-

cations facilities over long periods (for example, TaiwanSector Constraints 24 percent in 1966-77 and Brazil 15 percent in

1972-82). Some telecommunications entities becameThree main factors, partly interrelated, limit develop- strong enough to continue to perform during difficultment of the telecommunications sector. First, sector times (for example, Ethiopia and El Salvador). Otherpolicies are often inadequate. The enterprises are usu- successes, however, were short-lived. Also, domestically viewed as traditional public sector utilities without manufacturing sometimes resulted in high costs, lowregard to their business character and resource mobili- reliability, or delays in technological innovation. Gen-zation potential. In particular, they often lack financial erally, supply of basic services continues to fall shortand administrative autonomy, have little incentive to of demand, quality and reliability remain low, and newimprove performance, are not allowed to remunerate and services are mostly not available.promote staff as necessary to attract and retain special- Merely increasing the share of public funds and ex-ized personnel, are denied tariffs that reflect costs, can- temal aid allocated to telecommunications, within thenot access capital markets despite being profitable busi- limits feasible at the expense of other sectors, will notnesses, and suffer from govemment interference in nearly suffice to redress these shortfalls. Improving themanagement. efficiency with which existing telecommunications en-

Second, telecommunications investment is con- terprises use scarce resources, although essential, is atstrained by the countries' limited capital resources, best a slow process-and, most important, is unlikelyespecially in foreign currency. On average, about to produce significant results unless appropriate incen-US$2,000 is needed to provide one additional telephone tives are built into the sector policy framework.line, of which 50-80 percent is in foreign exchange inmost countries. Furthermore, like other public or para- Alternatives for Sector Developmentpublic entities, telecommunications enterprises are sub-ject to investment ceilings related to broader efforts tocontain public sector spending. In the context of the changing world telecommunica-

Third, weaknesses in the organization and manage- tions environment, the govemments of developingment of telecommunications enterprises result in high countries are starting to seek ways to address theseexpansion and operating costs, poor maintenance, and constraints more effectively than in the past. Alterna-limited capability for project preparation and imple- tives to the traditional state telecommunications mo-mentation. As a result, telecommunications develop- nopoly are being considered in order to increase privatement often cannot be accelerated even when more participation, competitive discipline, and the autonomyfunds are made available. and commercial orientation of the enterprise. It is ex-

pected that such changes can raise investment levels,OercomingV Sector Constrabits mobilize new sources of capital, attract entrepreneurial

talent, improve enterprise efficiency, and enhance re-Attempts to overcome these constraints vary from sponsiveness to user demands. The approaches taken bycountry to country. Financial and administrative au- individual countries vary considerably, but two maintonomy has been enhanced in some countries by reor- directions of change can be noted: operations are being

Figure 12-2. Moving Away from Government Operation

Govemment Board State or State- Mixed Mostly or whollyCovepament or parastatal owned ownership privatedepartment office enterprise company company company

Morocco

Fiji _

Nigeria _

Malaysia

Jordan

Sri Lanka

India

Pakistan

Argentina

Mexico

Chile

Guatemala

Turkey =

Panama

Beginnings of Sector Refonn in the Developing World 93

moved further away from government, and the role of ment resources; and generates new business opportuni-monopoly is being reduced. ties elsewhere in the economy. Five main approaches

are being considered: subcontracting, private provisionMoving Operations Away from Government of subscriber equipment, competitive provision of some

services, development of dedicated business networks,In the context of appropriate sector policies and regula- and trade of capacity among networks.tion, shifting the responsibility of providing public tele-communications services away from the government Subcontracting. The telecommunications enter-can make it easier to achieve greater efficiency, flexibil- prises can subcontract all habitual tasks that can be per-ity, and freedom from excessive political intervention. formed by other firms. Such tasks include civil works,Particular solutions include the transformation of a cable ducting and laying, equipment installation, tele-government department (or part of one) into an auton- phone directory publication, and operation of publicomous state enterprise; the reorganization of a public telephones. New fields can be considered, such as sub-enterprise into a corporation under commercial law scriber wiring, cable splicing, and maintenance ofwith various degrees of state equity; and the transfer minor plant (for example, subscriber installations,of government equity in mixed-ownership enterprises rural exchanges and transmission). Where suitable sub-to private investors or the public at large. Figure 12-2 contracting firms are not available, a strategy can be de-summarizes shifts of this type, which will be briefly de- vised to develop them if they are economically justified.scribed later. Possibilities could include contractual arrangements

Movement of telecommunications enterprises away with foreign firms to provide management, supervision,from government can be strengthened by innovative and local training.financing and investment strategies. In particular, inthe case of telecommunications enterprises organized Private provision of subscriber equipment. The pro-under corporate law, subscriber financing in the form vision and maintenance of subscriber terminal equip-of mandatory capital contributions to the telecommu- ment (for example, telephones, teleprinters, and privatenications enterprise in exchange for shares, besides automatic branch exchanges) can be left to privateraising investment funds and rationing excess demand firms on a competitive basis. Benefits of doing so in-for connections, can be used to develop private owner- clude a broader choice of equipment, often a loweringship and bring commercial pressure to bear on man- of prices, and reduction in the load on the telecommu-agement. Resale of subscriber shares can increase this nications enterprise. In many countries, this step merelyeffect by allowing some concentration of private owner- consolidates and organizes a process that has alreadyship (and can also help develop the domestic capital started by default of the monopoly enterprise and in themarket). Mandatory long-term debt financing (for ex- absence of proper technical regulation.ample, bonds) also offers some of these benefits. For-eign partnerships can both mobilize fresh financing (in Competitive provision of some services. Private en-foreign currencv) and strengthen the enterprise's com- terprise can be relied upon to provide certain public tele-mercial approach. Foreign investment, build-operate- communications services. The private provision of ser-and-turn-over ventures, and other modalities of foreign vices helps bring competitive discipline especially toparticipation may also be appropriate. The splitting up small but potentially fast-growing parts of the sector,of large telecommunications enterprises into parts that mobilizes additional investment, and meets needs forcan be more readily financed and managed, and other new services without placing an additional burden onmeasures, can facilitate bringing in domestic and for- the main telecommunications enterprise. Options to beeign private capital. considered can include the following. New specialized

business services (for example, data and mobile teleph-Reducing the Role of Monopoly ony) and some established ones (for example, telex)

could be provided by private firms with little or no limi-Existing monopolistic telecommunications enterprises, tations on market entry. New networks (for example,irrespective of corporate status and ownership, can be fixed-station variants of cellular radio telephone) over-relieved of responsibilities that others can discharge. laying highly congested parts of the existing networkThis relief permits the monopoly enterprises to concen- with little prospects of overall improvement could offertrate on the large task of developing countrywide infra- quality basic service at a premium price to meet urgentstructures of basic services; introduces competitive needs (some static efficiency loss would result from par-pressures likely to enhance sector efficiency, respon- tial plant duplication). Both forms are likely to attractsiveness, and innovation; mobilizes additional invest- foreign suppliers and investors. With some technical

94 Bjomn Wellenius

assistance and financing, telephone cooperatives and meet resource mobilization objectives; the setting ofsmall independent companies could be established to technical interconnection standards to ensure the in-extend service to numerous scattered rural areas not tegrity of the network; the licensing and monitoring ofcovered by the main telecommunications enterprises. use of the radio spectrum, a scarce natural resource;Existing monopoly service areas (or parts of them) and representation of the sector in intemational tech-could be franchised through competition to private nical and administrative negotiations. (Chapters 2 andfirms able to mobilize investment funds. Through such 4 examine these questions in detail.)arrangements well-run private business networks couldalso take on responsibility for providing public serviices Examples from Developing Countriesin some areas.

Business networks. Large business users can estab- Such altematives to the traditional sector structureslish their own telecommunications networks when in cannot be lightly dismissed as fads or as unwarrantedtheir view by doing so they can meet their needs better replications of the experience of industrialized nations.than the public telecommunications enterprises could. Developing countries and newly industrialized coun-Private networks can help overcome communication tries show unequivocal signs of the same underlyingconstraints in productive sectors, mobilize new sources forces of change and of the beginnings of sector reformof funds (domestic and foreign) for telecommunica- in response to them. The following examples illustratetions investment, meet the communication require- this point.ments of new foreign investments in traditional sec-tors, and develop new export-oriented information Asia and tfie Pacificservices.

Fiji. An interministerial commission recently recom-Capacity trade. Sector policies that facilitate the mended that the Telecommunications Department's

trade of telecommunications capacity among the vari- operations be reorganized as a 100 percent state-ownedous private and public telecommunications facilities corporation under company law, that policy and reg-can furthermore promote economies of scale and tech- ulatory functions remain with govemment, and thatnological innovation. the status of FINTEL (a joint venture between the gov-

emment and Cable & Wireless that provides intema-Separating Policy and Regulatory Functions tional services) remain unchanged.

Consideration of alternative ways to develop telecorm- India. In 1985, the Department of Telecommunica-munications raises difficult issues in sector policy and tions' operations in Delhi and Bombay were spun off asregulation that were previously relatively unimportant. a commercial enterprise that has raised capital in theIn particular, it becomes necessary to decide what ser- local markets and quickly improved service perform-vices are to be provided by one or more monopolistic ance (see Chapter 15). Further decentralization isenterprises and what services can be offered by other likely, but the emerging new market structure remainssuppliers or by users for themselves. Rules are needed undefined. Also, parallel high-capacity networks areto delineate these two domains and to regulate the in- being built by large users without the benefit of a policyteraction among participants, and a legal framework and framework that by encouraging capacity trade amonginstitutional arrangements need to be established for them and with the telecommunications entities wouldenforcement and for reassessment and modification of result in substantial cost savings to the country as athese rules as conditions change. whole. Major adjustments in sector policy and regula-

As traditional telecommunications monopolies yield tion are needed to provide a framework in which theseto more complex structures and growing numbers of and similar changes may succeed in the long run (seeparticipants, the govemment's role in encouraging and Chapter 14).regulating sector activity becomes distinct and increas-ingly important. This role includes the regulation of Indonesia. The govemment is aware of the impor-tariffs and financial flows among operating companies tance of developing a modem telecommunications net-to ensure the sector's viability as a whole, its respon- work capable of more effectively supporting the coun-siveness to broader development objectives, and the try's industrialization and participation in global trade.containment of monopoly power; the regulation of fi- A high-level commission has been set up recently to re-nancial flows between the sector and govemment ito view sector policy and structure.

Beginigs of Sector Reform in the Developing World 95

Laos. Sixteen independent provincial telecommuni- is being pursued. In the meantime, extensive use iscations entities were recently merged into a national being made of private contractors on a turnkey basisstate entity to undertake a concerted effort at plant re- to overcome bottlenecks in the design, procurement,habilitation and institutional development capable of and construction of a cable plant.later implementing more ambitious growth programs.

Europe and Middle EastMalaysia. Operational functions of Malaysia's former

Telecommunications Department have been trans- Hungary. A series of reforms is being undertaken inferred to a separate, new telecommunications enter- the telecommunications sector. The Posts and Tele-prise organized under private company law with 100 communications Department has been reorganized,percent state ownership (see Chapter 16). and a more commercial management style has been

adopted, especially in the area of finance. A numberPakistan. A major reorganization of the sector is of telephone cooperatives have been established, and

under way, and a corporation will be established to take further liberalization of the market structure is ex-over the telecommunications operations of the Tele- pected when a new telecommunications law is enactedphone and Telegraph Department. Consultants will as- shortly.sist in examining longer-term restructuring poss-ibilities. Jordan. A major study of sector restructuring options

is about to be launched, with tentative recommenda-Papua New Guinea. The government is overhaul- tions expected by mid-1989. The recommendations will

ing sector policy and reorganizing the operating entity probably favor enhanced autonomy for, and commer-to improve economic efficiency and financial per- cialization of, the state telecommunications entity andformance. increased private sector participation in the telecom-

munications business (see appendix A to this chapter).Philippines. Unlike most developing countries, the

Philippines has telecommunications services that are Turkey. The state postal, telephone, and telegraphlargely provided by private enterprises. Growth has entity (mrr) is being divested of its shares in two majorbeen insufficient to meet development needs, however, domestic telecommunications manufacturers. Tele-and service is largely concentrated in a few major communications has been tentatively included in theurban areas. A high-level commission has been set up, govemment's privatization master plan. In the mean-with the participation of private operating companies, time, foreign investors proposed to set up a network oftelecommunications and economic authorities, major fixed radio telephones using cellular technology to pro-users, and other key players, to help devise a devel- vide premium service in congested business areas of Is-opment program for the telecommunications sector tanbul and Ankara, but eventually this network was es-to overcome these shortfalls and improve sector tablished by the PTT.regulation.

Latin America and the CaribbeanSri Lanka. The Telecommunications Department is

being reorganized as a commercial company able to op- Argentina. As part of broad economic reforms, theerate and raise domestic and foreign capital with con- govemment is preparing legislation that would limitsiderable autonomy. Preparation of a new telecommu- the state's telecommunications monopoly (ENTEL), en-nications law is well advanced, to be followed by the courage growth of existing and new privately ownedsetting up of a regulatory agency, the restructuring of telecommunications enterprises and of interconnectedthe telecommunications operating entity, and a search corporate networks, deregulate most prices, and sepa-for foreign investors (see Chapter 13). rate policy from operational responsibilities. More re-

cently, a letter of intent was signed with Spain's tele-7hailand. Consideration has been given from time to phone company, which would buy about 40 percent of

time to sector reforms that would make it easier to ENTeL (see appendix B to this chapter).catch up with huge unmet demands and to improveservice quality and reliability. One option examined is Brazil. Mandatory subscriber purchase of telephonethe franchising of foreign companies to operate and de- company shares has helped finance expansion since thevelop parts of the existing system, especially in the capi- early 1970s (as it has in Mexico and as it did earlier intal city and in areas where rapid economic development Japan, where telephone bonds also led to development

96 Bimrn Wellenius

of the capital market after World War II). In about fif- and deteriorating service quality, however, have re-teen years Telecomunicac6es Brasileiras SA. (TELEBRAS) cently brought the sector much public attention. Plansbecame the largest telecommunications system among to accelerate investment by the main telephone com-developing countries and about the tenth largest world- pany (a parastatal) conflict with the govemment's re-wide. As growth slowed down in the mid-1980s because newed efforts to reduce public and parapublic spending.of economic conditions in the country, however, unmet There is pressure from U.S. carriers to enter the marketdemand rose quickly, and service quality deteriorated. and from big users to set up their own networks.Major commercial banks and other big business userswant to build their own data networks so that they can Panama. Two private telecommunications compa-meet their specific needs better. nies offering intemational services partly in competi-

tion with the main public sector enterprise reportedlyChile. After more than twenty years of sector stagna- will be merged with the latter when their franchises ex-

tion, unresolved issues pertaining to policy and regula- pire. Is this step a costly mistake for a country that aimstion, and changes in ownership from fully private in at becoming a world-class financial center or an earlythe 1930s to mainly state owned in the 1970s to limited signal of reversal in world trends?privatization and liberalization in the early 1980s, thegovemment sold majority ownership of the main tele- Trinidad and Tobago. The govemment is preparingphone company to an Australian investor. More re- to privatize the national telecommunications companycently, the second largest company became mainly and is examining possible ways in which foreign inves-privately owned when part of the state's share was tors may participate.sold in the local stock market. (See appendix C to thischapter.) Africa

Colombia. Telecommunications services have long Ghana. The govemment seeks to reestablish the au-been provided by regional and municipal entities, some tonomy of the Posts and Telecommunications Corpora-of them remarkably successful. Still, with more than tion, which has been eroded by recent poor financialforty telecommunications enterprises, many of them performance and staff losses. Measures have been de-too small to raise financing and build up a full comple- signed to split the posts from telecommunications andment of technical skills, there is considerable scope for to create two separate entities whose structure and or-further sector consolidation. ganization are under study.

El Salvador. In late 1987, COMTELCA, the regional Morocco. Telecommunications operations, previ-technical organization of the five Central American ously a part of the govemment's administration, weretelecommunications enterprises, held a seminar on reorganized three years ago as a semiautonomous of-telecommunications sector restructuring in El Sal- fice. This office has since contracted out civil works tovador. local firms and is now starting to do the same for cable

network construction, including assistance and supportGuatemala. Govemment and the state telecommuni- to new contractors.

cations enterprise are examining opportunities for at-tracting private investment as a means of overcoming Nigeria. In the context of the govemment's policy topublic sector constraints on telecommunications transform major public sector entities into commercialgrowth in the capital and provinces. enterprises, a state-owned telecommunications com-

pany was established in 1985. In addition, the NigeriaJamaica. A teleport in Montego Bay is planned to National Petroleum Company is building an extensive

help develop labor-intensive data entry, reservation, di- fiber optic dedicated network reaching some regionalrect order, and other information services via satellite capital cities and important commercial centers in thefor major U.S. corporate clients. southeast; use of this facility for transmission of public

telecommunications is being considered. A national tele-Mexico. Mexico has the second largest telecommuni- communications policy, now being prepared, may in-

cations system among developing countries and about clude a recommendation to establish a separate regula-the fourteenth largest worldwide. Large unmet de- tory agency.mands for basic services, limited response to quicklychanging and growing business needs for new services, Tanzania. The government intends to review the

Beginmings of Sector Reformn i the Developing World 97

regulatory framework and to define sector objectives issues are to be properly identified and handled; and ifmore clearly. telecommunications sector decisions are to be recon-

ciled with the country's broader development strategy,Uganda. The telecommunications sector has been se- including regional and industrial objectives and goals

verely run down as a consequence of the country's pG- for income distribution.litical and economic difficulties. Nevertheless, majornetwork rehabilitation is under way, and interest has Appendix A. Jordan Telecommunicationsbeen expressed in institutional strengthening and in re- Prepare for Sustained Growthviewing the ways in which the sector is managed andoperated.

The Jordan Telecommunications Corporation (Tcc), es-Conclusions tablished in 1971 as a semiautonomous govemment

operation, took over services previously operated by theMinistry of Communication. It has since expanded at

The technological and economic forces that are driving a sustained high pace, has built a modern (largely digi-change in the telecommunications sector in the more tal) network, self-financed a substantial proportion ofadvanced economies clearly also apply in the develop- these investments, and transferred financial surplusesing world. These forces result in new opportunities, as to government.well as new pressures, for developing countries to over- Further development of TCC is constrained, however,come protracted constraints on sector performance and by insufficient financial and management autonomy.growth. Tcc and the government are considering possible re-

Whereas the particular timing and nature of the so- structuring of Tcc (as well as two other large public sec-lutions are highly country-specific, no country can af- tor enterprises) under private corporate law, initiallyford to ignore the broader range of strategic options with 100 percent state ownership and possible later par-that is emerging. Unresponsive structures in the tele- ticipation of private and foreign capital.communications sector will continue to hinder eco- At the same time, various actions are under waynomic and social development and intemational com- within Tcc to improve performance, including buildingpetitiveness. Immobility is also likely to be ultimately up commercial accounting and financial management,unenforceable. Responses to these changing conditions strengthening system planning and project manage-raise broad policy and regulatory issues that were rela- ment, moving from tied supply of equipment under bi-tively unimportant earlier. lateral lines of credit to international competitive

Few govemments, however, are well equipped to ad- procurement and financing, and replacing tumkeydress the questions. Many are not even fully aware of contracts by disaggregate purchase of goods and ser-the issues, the altematives, and the risks of inaction. vices and farming out cable construction to privateIn telecommunications, unlike other sectors (for exam- contractors-possibly a joint venture between local andple, energy and agriculture), there is generally no ex- foreign firms initially.plicit policy. Effective means of developing a sector pol-icy are also seldom in place. Responsibility for policy Appendix B. Sweeping Sector Reformsand regulation is often vested in monopolistic opera- Considered in Argentinating enterprises. In this situation structural change isdiscouraged, the expertise needed for broader analysisis lacking, and decisions for change are shifted to the The Argentine telecommunications system has been inpolitical arena instead of being handled within the sec- deep trouble for a long time. With about 3.5 million tel-tor framework. ephone lines in service, there are more than I million

Efforts to overcome the inadequacy of telecommuni- unmet applications, some of them twenty-five years old.cations services will therefore often require building Service quality is poor, and massive communicationwithin govemment a capability for independent policy bottlenecks have built up in all economic sectors andanalysis and separating policy and regulatory responsi- in govemment administration. In Buenos Aires, report-bilities from the responsibility for providing the ser- edly an apartment without telephone rents for one-vices. These changes are essential if the govemment is third less than similar properties with telephone, andto expand its views on long-term strategy; if altema- existing telephone lines are privately transacted for astives to the prevailing sector structure are to be exam- much as US$5,000.ined impartially; if critical telecommunications sector Empresa Nacional de Telecomunicaciones (ENTEL),

98 BJ6m Wellenus

an autonomous state enterprise, operates most of the in CTC are being sold through international competitivetelecommunications system, except for about 10 per- bidding. The bidders-foreign, Chilean or joint ven-cent of telephone lines run by a private company (a sub- ture-were asked to invest subsequently a furthersidiary of L. M. Ericsson) and some 200 rural telephone US$160 million in the company. Including minoritycooperatives. Two years ago ENTEL launched MECATEL- private shareholders (mainly cTc workers and the pub-essentially a plan to make subscribers finance telephone lic at large), private ownership will thus increase fromexpansion up front. About 800,000 applicants paid about 25 percent in 1987 to 51 percent in 1988 andUS$750 (residences) or $2,500 (businesses) to obtain more than 77 percent by 1996. Reportedly, competitiontelephone service quickly. Some 40 percent have been was fierce. The package was awarded to Alan Bond, analready connected, and the rest are likely to be com- Australian investor, who reportedly has retained Ja-pleted in the next two years. This step, however:, will pan's Nippon Telegraph and Telephone Corporation (it-demonstrably fall short of needs, and it has become ap- self recently privatized; see Chapters 7 and 8) to provideparent to the govemment that, under prevailing rules, technical support. With this influx of capital, by 1996ENTEL cannot meet demand. crc is expected to have about 1.2 million telephone

In November 1987, the govermment considered the lines in service (a growth rate of 10 percent per year,establishment of a privately owned banking telecom- double the rate achieved in 1976-86 as an autonomousmunications company to meet the needs of the finan- public sector enterprise), meet almost 100 percent ofcial community. Also, as part of broad economic re- telephone demand in urban areas (compared with lessforms, the govemment was preparing legislation that, than 70 percent at present), and expand considerablyif approved, will limit ENTEL's monopoly, will allow ex- in rural areas.isting private telecommunications enterprises to ex- This agenda follows more than twenty years of tele-pand without prior govemment approval, will encour- communications sector stagnation, a building up ofage development of dedicated business networks sector inadequacies and unresolved policy issues, andinterconnected with the public network, will deregulate changes in ownership, from fully private in the 1930smost prices, and will strengthen responsibility for sec- to mainly state-owned in the 1970s to limited privatiza-tor policy and regulation in the Ministry of Com- tion and liberalization in the early 1980s. The measuresmunications. More recently, however, Compafifa Tele- taken in the 1980s included the successful reorganiza-f6nica Nacional of Spain signed a letter of intent to tion of telex services from part of the Posts and Tele-form with ENTEL a new mixed-owned private company graphs Department of govemment to a highly profitablewith about 40 percent foreign investment. business-oriented autonomous state enterprise that

The outcome at the time of writing is unclear. The was eventually sold to Chilean private investors. It alsosolutions may be insufficiently thought through. Prob- included privatization of a mixed-ownership small re-lems are likely to develop and will have to be addressed gional telephone company.along the way as best as they can be. This is surely a Less successful was the emergence of scattered smallprime example of forces for change at playl private telephone companies catering to business and

high-income residential demands in parts of large citiesAppendix C. Chilean Telephones Privatized and resorts, which built local networks overlaying crcs

and financed these investments largely from up-frontsubscriber charges. None of the networks has attained

Compaifa de Telefonos de Chile (crc), with 95 percent anywhere near efficient size; one is bankrupt, and allof Chile's 0.6 million telephone lines in service and are involved in protracted litigation with CTC over reve-total assets worth about US$400 million, is being nue sharing, predatory practices, and other problems.privatized. US$100 million of the govemment's shares

13

Phased Privatization with Proposed ForeignParticipation: The Sri Lanka Experience

Vernon L. B. Mendis

The privatization of telecommunications in Sri Lanka, tempts to place calls, and frustration on the part of thea country faced with the constraints common to devel- subscriber. The trunk services with the rest of theoping economies, should be of interest, and should be country are poor because of imbalance and serious net-relevant, both to developing countries considering a work deficiencies. This unsatisfactory state of affairs haspolicy of privatization and to developed countries as given rise to mounting public discontent over theprospective collaborators. Now in vogue as a reaction years. It is a matter not only of frustration but also ofto the inhibitive policies of previous state control, pri- loss to the economy, waste of time and resources, andvatization is a laudable means of ensuring an efficient serious hindrance to the overall developmental effort.service and of making the best use of the manpower and In the context of an expanding economy engaging everytechnical resources of a country. The moral, if any, of sector and part of the nation, telecommunications hasthe Sri Lanka experience, however, is that it should been an anachronism that retarded development.not be regarded as a panacea for all cases or as a for- The reasons for the situation were correctly attrib-mula to be applied blindly. Indeed, no particular for- uted by a Presidential Commission of Inquiry to inade-mula for privatization carries a guarantee of success. quate capital investment, lack of motivation on the partRather there is a need for a pragmatic approach that of staff, and a shortage of skilled and experienced staff.considers each case on its merits and adopts a strategy There was a vicious circle: low pay led to a flight ofthat is best suited to the country's particular circum- skills and lack of motivation, so that the quality of thestances and objectives. Privatization is therefore mainly service was reduced. In this seemingly irreparable situ-a direction toward which several roads may be taken, ation, the capital support needed for expansion of theand it is up to the country concemed to find the right network and consequent improvement of the serviceone. was not forthcoming. Paradoxically, telecommunica-

The government of Sri Lanka made the decision to tions remained a paying and profitable concern, but itsprivatize telecommunications in 1985. It did so in rec- steadily rising annual profit was treated as revenueognition of a number of factors. Foremost among them from a govemment department.was the poor quality of the existing network and service The state of telecommunications in Sri Lankacompared with those in many other developing coun- prompted pressures from several quarters for upgrad-tries. The telephone density of 0.7 per 100 population ing and reorganizing the system. The public demandedwas lower than in several Asian, African, and Latin an improvement in service and an increase of sub-American countries, and the annual growth rate of scriber lines by about half because of the long waitingabout 4 percent also lagged behind. In a population of list. The needed changes were of special concem to15 million, there are at present only 93,000 subscrib- consumer groups such as exporters and big businesses,ers, and there is a waiting list of about a third of that whose activities were hampered. Business groups werenumber. The service is concentrated in Colombo, also interested in commercial possibilities that recentwhich has more than 50,000 lines, but exchanges are technological breakthroughs had created.so overloaded that there is congestion, unsuccessful at- The problem of poor telecommunications in Sri

99

100 Vernon L. B. Mendis

Lanka was viewed with particular concern by intema- tal could use their technology, expertise, and manage-tional aid agencies such as the World Bank, as it created rial skills. Nations such as Sri Lanka that need capitalbottlenecks to economic advancement that these agen- support will want a different package of investment, eq-cies were attempting to accelerate. In fact, successive uity, and managerial support. The basis for collabora-World Bank missions to Sri Lanka had drawn attention tion should preferably be settled between the partiesto this telecommunications gap and had urged that concerned, and no hard and fast conditions are desir-measures to rectify it be taken speedily. Their proposals able. There is, however, a discernible bias in what isprimarily sought to bring about a total reorganization called the management contract, under which the col-and restructuring to create a new system that would laborator seems to expect full control for a period. Thisenable telecommunications to be operated along com- bias may be appropriate in the case of countries in amercial lines. At the same time, these agencies showed rudimentary stage that lack experience and personnel;an overt interest in privatization, and the Asia Develop- however, it would hardly be appropriate for a societyment Bank held a seminar on the subject in 1985 and such as that of Sri Lanka, which meets relatively highpublished the proceedings. Since that time privatiza- standards in administration and telecommunicationstion has been discussed at great length from every and in which deficiencies are mainly due to financialangle at a host of international conferences and semi- constraints. In such a case what is needed is managerialnars, the conclusions being broadly in favor of a me- support, rather than control, so as to acknowledge thethodical approach to achieving it. Historically, the aspirations of the local engineers, many of whom aremajor impetus for privatization and also for rethinking well trained, as well as to develop the country's ownand restructuring telecommunications has been the management system and resources. This considerationhighly publicized and successful privatization of tele- highlights the need to view collaboration not as a dik-communications in the United Kingdom, which has tat from one affluent party to a deprived one but as afired imaginations. The U.K. experience also offered a fair partnership reached in a constructive spirit of co-kind of structural and conceptual model for the mariner operation.of implementation and the steps involved. Admittedly, The decision to privatize came as the sequel to thethese reflected a certain political and economic philoso- appointment of the Presidential Commission of Inquiryphy on the part of the U.K. govemment that other gov- to report on the reorganization of the Department ofemments may not necessarily share, but the U.K. expe- Telecommunications and the setting up of a cabinetrience in translating philosophy into practical, concrete Subcommittee on Telecommunications. The report ofterms may be relevant to others. the presidential commission was published as a ses-

Interest in the restructuring of telecommunications, sional paper and made the following principal recom-whether through privatization or in any other suitable mendations:way, has also fostered a desire for collaboration on thepart of major telecommunications organizations in the * Establish a regulatory body known as the Nationaldeveloped world. These organizations would invest eq- Telecommunications Commission (NTC)

uity, capital, and expertise in exchange for a fair amd * Convert the department into an autonomous or-assured return on their investment. From the collabo- ganization run on a commercial basis, the owner-rators' standpoint, such an arrangement would be a ship of which may be shared by the government,profitable investment, would provide outlets for their the local private sector, and foreign collaboratorstechnology and expertise, and would forge a durable re- * Draft legislation for the creation of the NTC andlationship with developing countries. This situation the Telecommunications Corporation of Sriwould certainly be in line with modem international Lanka.ethics of partnership for mutual benefit between devel-oped and developing countries. The prospective collab- The cabinet subcommittee, pursuant to the propo-orators have suggested various propositions ranging sals of the Presidential Commission of Inquiry, invitedfrom partnerships, management contracts, suppliers' offers for collaboration from interested parties and re-credits, and other forms of association. Not all of the ceived a number of proposals. The interest in privatiza-potential collaborators stipulate privatization as a con- tion expressed the economic policy of private enterprisedition for such arrangements, though it is admitted and liberalization professed by the United Nationalthat considerable restructuring would be needed before Party (UNP), which came into power in 1977. This policybenefits could be realized. represented a radical departure from the tradition of

Foreign collaboration can in principle make a useful previous regimes, which had brought major areas ofcontribution, depending on the circumstances of the economic activity under state control. The result hadcountries concerned. Nations without problems of capi- been an adverse effect on enterprise, with a concomi-

The Sri Lanka E.xperience 101

tant disincentive to investment. The state corporation company formed from an existing entity by enablingthat arose in lieu of private enterprise had had a dismal legislation that would initially be owned by govemmentcommercial record and in most cases had incurred fi- but would operate independently with its own manage-nancial loss. The free enterprise policy of the present ment and would in due course enter into a mutuallygovemment countered this experience and embodied advantageous joint venture with a foreign collaboratoran expression of faith in liberalization to promote eco- chosen through a comparative process of negotiation.nomic development and create a climate of confidence Broadly speaking, the choice is between a public corpo-that would attract foreign investment and foreign aid. ration with independent management but subject fi-

Foreign countries and intemational agencies, which nancially to govemment control, a corporation opera-were particularly mindful of the economic climate in ting through a wholesale management contract, aconsidering support for countries, found that the policy public-private company operating on its own with gov-of privatization accorded well with their own perspec- emment ownership of the majority shares, and atives and predilections. Against this background the public-private company that is fully independent ingovernment appointed the chairman and the Telecom- management and that would enter into foreign collabo-munications Board of Sri Lanka to implement its deci- ration as a joint venture with shared risks and responsi-sion regarding privatization. The board was to draft bility.legislation creating the NTc, form the Telecommunica- In Sri Lanka the board has opted for an independenttions Corp., and explore prospects for foreign collabora- company to be followed by collaboration under an en-tion. In addition the board had the responsibility of abling act of Parliament that will authorize the transferconceptualizing the process of privatization and formu- of the department's assets to the company. It is impliedlating a strategy for its implementation. The board con- that there will be a period when the company will besists of the chairman and nine members representing on its own and will use the opportunity to get its bear-the ministry and department, financial and commercial ings as a commercial organization, to acclimate itself,organizations, and law. The chairman and board are di- and to develop its own management and managerialrectly accountable to the head of state and function in skills. The course of action that collaborators tend toa planning, deliberative, and executive capacity in car- advocate-that is, rushing into joint ventures or man-rying out its mandate. In its work the board draws on agement contracts-would merely stultify the venturethe financial assistance and expertise of the World and dep'rive it of an opportunity to develop itself andBank. its self-confidence. Such a choice would also reduce the

Since the board has been in existence it has dealt opportunity for the local personnel and management towith a range of problems, has attempted to find viable develop their skills and gain experience. Furthermore,solutions to them, and has made substantial progress the formation of a company as the first stage providestoward the attainment of its objective. These problems a good base for foreign collaboration and enables it toand the measures and decisions taken constitute the Sri negotiate better terms than it could as an unfledged en-Lanka experience of privatization. They may be peculiar tity. This is not the easiest course because the companyto Sri Lanka, but in a general sense some of them are must stand on its own and prove itself, but in the longlikely to arise in other countries as well. The Sri Lanka run it is the better and healthier way because the com-experience summarized below could thus have a wider pany develops an independent personality that can holdrelevance. its own in any partnership.

Concept of Privatization Legislation

There are many paths to privatization. A country must An act of Parliament is essential to effect the transitionchoose the one best suited to its needs and cir- from a govemment department to a company becausecumstances. Some of the available options include an of the sensitiveness and national importance of tele-autonomous corporation operating on its own, inde- communications. An act lends legislative sanction topendent of govemment, or through a management the changes and protects the new order from legal ac-contract with a foreign collaborator; a joint venture tions and challenges. This consideration is particularlywith a foreign collaborator, with the latter responsible relevant in view of the considerable assets of the depart-for management; a public-private company with its ment, which include properties and holdings. The U.K.shares initially owned by govemment but operating in- model is relevant in this respect; Great Britain effecteddependently and progressively selling shares to the privatization through a comprehensive act of Parlia-public and foreign collaborators; and a public-private ment, the Telecommunications Act of 1984. In Sri

102 Vernon L. B. Mendis

Lanka, however, the question was whether new legisla- have the responsibility of examining the credentialstion was needed or whether the existing telecommuni- of applicants an1 recommending a suitable nominee.cations ordinance could simply be amended. The an- The terms of the i%cense will be negotiated between theswer is categorically in favor of new legislation, as the NTC and the company.change contemplated is a radical one conceptually,technically, and structurally. Sweeping amendments to National Telecommunications Commissionthe present ordinance would be needed, and it wasmore logical and easier to draft a new act altogether.The new legislation embodies wholly new concepts and The key feature of the act provides for the establish-defines new entities such as the NTC that would not lend ment of a regulatory body known as the National Tele-themselves to incorporation in existing legislation. The communications Commission (NTC). This concept is aact also provides for the divestiture of the departrnent departure from previous state control and has thereforeand the transfer of the assets to the new company. been viewed with misgivings. The role of the NTC is to

The enabling legislation authorizes the minister to supervise and regulate the operations of the companyvest the assets of the department in the company on and to ensure that it is acting in accordance with thea prescribed date. A principal feature of the act is the act and with the terms of the license. Previously thesetting up of the NTC as an independent body that will govemment was both judge and prosecutor inasmuchregulate the activities of the company on the one hand as it operated the system and also regulated it. Whenand ensure that the company can operate freely without there was a department, the govemment was the trus-undue interference or hindrance on the other. Other tee and the owner accountable to Parliament, but withimportant provisions of the act relate to powers of the the formation of the company responsibility will begovernment and its role as represented by the minister shared by Parliament and the NTc. The NTc is intendedconcerned, the issue of licenses to operate telecommu- to serve as a buffer between the state and the company,nications systems and networks, the acquisition of and it has had to be conceptualized in a way that onproperty and grant of right of way for the installation the one hand would not hamper the company fromand maintenance of telecommunications services by operating as a commercial body but on the other handthe company, coordination between the company and would ensure proper performance and standards andother local authorities with respect to its operatioDns, protect the state and the consumer from exploitation.the position of the employees of the department after Its effectiveness therefore depends on its being autono-the change, and offenses and penalties for infringe- mous and not vulnerable to pressure or influences. Thisments. The act will be supplemented in due course by independence is to be ensured by the appointment ofsubsidiary legislation. The act's purpose is to make the the chairman and other members of the commission bytransition possible and, this being a wholly new venture the head of state. They are not removable except on spe-and experience, to set forth the legal framework within cial grounds specified in the act. There is the furtherwhich the new telecommunications order will operate. implication that the NTc cannot act as a law unto itselfDetails of the operations or instructions to the opera- in view of the possibility for action by the head of state.tor will be embodied in the licenses issued under the In addition, the act provides for a relationship betweenact. the minister and the NTC such that the former can in

given circumstances exercise his authority.License The establishment of a watchdog body is in keeping

with traditions in the United States and the UnitedKingdom, which have control commissions to temper

The license, the operative document to be issued under the effects of competition and the dominance of bigthe act, would authorize a telecommunications system business. In some countries this function is exercisedand other auxiliary services to be operated. The license by the government. This would be possible if the gov-should be a functional document and should specify de- emient itself were able to act dispassionately, buttails such as tariffs, charges, and terms and conditions there is no guarantee that it could, and political inter-for the operation. In so doing it should amplify and ference might nullify privatization. Another considera-elaborate on the provisions of the act. The board favors tion in designing the act in Sri Lanka has been the needa simple, functional document that would lay down for it to offer an incentive to prospective investors, andthe basic terms without elaborate details. According the act takes into account the objective of entering intoto the act, the license would be issued by the minister foreign collaboration. The independence of the NTC inon the recommendation of the NTC. The NTC would this context is of the utmost importance as a guarantee

The Sri Lanka Evff*" 103

against interference and as an eamest indication of basis, however, may be tolerated in return for goodintent. service.

In drafting the legislation and the license, the boardwas assisted by U.S. and Commonwealth consultants, Mwhose experience and advice were a great help. It will anagement and Organizationbe a challenge to establish the NTC and put it in opera-tion. One must choose between different models, such The success of privatization will depend on whether theas the Office of Telecommunications (OFTEL) in the company measures up to expectations and realizes itsUnited Kingdom and the Federal Communications objective. To realize these expectations, managementCommission (Fcc) in the United States. The issue is to and organization must be designed to motivate employ-create a body suited to our needs and environment ees and instill positive work attitudes during the bansi-rather than to copy another. A blueprint drawn up in tion from department to company. This goal cannot beSri Lanka envisages a body comprising technical, ad- achieved automatically by institutional change aloneministrative, legal, and international divisions func- and calls for a change in staff attitude. Special attentiontioning under the direction of an executive head, imple- is being paid to this aspect in the privatization programmenting the decisions of the commission, and advising in view of its crucial importance. The services of severalit. By its very nature the NTc will need to have a juridi- consultants on organization and management, bothcal character, as it will investigate complaints, have local and foreign, have been engaged to recommend ahearings, and exercise supervisory functions. In an en- suitable organizational and managerial structure.vironment of state control, the concept of an NTC or a There is a need to design the layers of management,regulating independent body will not gain easy accept- particularly at the higher echelons, and to identify theance because it has a limiting effect on the power of principal executive authorities and their correspondingthe administration, but it is indispensable for true pri- spheres of responsibility, the organizational makeup invatization. relation to priorities, and the regional structure and

pattern. These issues in turn raise numerous questions

Tanffs such as the identification of staff positions, job descrip-tions, the structure of divisions and distribution offunctions, and the creation of new services and fields

A key question in privatization relates to the fixing of of activity such as training, research, intensified cus-tariffs and call charges. There is fear on the one hand tomer service, and public relations. Salaries and remu-that these may be unconscionably increased by the neration need to be fixed on a much higher scale thancompany in order to maximize profits at the expense at present to provide incentives and to absorb taxa-of the consumer and on the other hand that, if the com- tion on income. Decisions are also needed in regardpany is under the control of the govemment, company to overtime payments, incentive payments, bonuses,interests may be prejudiced. Hence there is need for a and privileges to make up for certain losses conse-balance to be struck and for an objective basis to be es- quent on the termination of their employment undertablished. The practice seems to vary between coun- govemment.tries. The tradition in the United States is for an ad hocbasic mutual agreement regarding what is considered Development of Human Resourcesto be reasonable. The altemative is for tariffs to be re-lated to a formula that is in turn based on an objectiveindex such as the cost of living. This is the method Allied to organizational changes is the need to provideadopted in the United Kingdom. There could also be a comprehensive training program through which rele-unilateral fixing of tariffs, but this approach may not vant sections of the department will be inducted intobe acceptable to all parties concemed. The Sri Lanka act the new system. The program will also acclimate staffenvisages tariffs that would be fixed by consultation be- to the new environment and orient them to the newtween the NTC and the company, with the final decision tasks. The courses-mainly technical, administrative,being taken by the Nc. The govemment, however, also managerial, and financial-cover key areas involved inwishes to be in the picture, as tariffs affect revenue, cost the transition and are offered by local institutes suchof living, and the interests of the consumer. The cur- as the National Institute of Business Management orrent tariffs in Sri Lanka are considered to be too high are especially arranged by them on request. Theby certain partie that fear a further increase with pri- courses being taken at present relate to the forthcom-vatization. A high tariff level fied on an acceptable ing transition, and their immediate objective is to pre-

104 Vemon L. B. Mendis

pare staff for the change. Overseas training programs Financefor hand-picked individuals are under consideration,but it may be necessary to defer them until after the As part of the organizational restructuring, a new sys-formation of the company, when requirements can be tem of financial management and accounting will bemore accurately determined. It is hoped that the com- necessary, in keeping with the commercial objectivespany after its formation will undertake large-scale and perspectives of the company. Furthermore, to de-training programs so that personnel at all levels can termine the capital structure of the company, it will begain the necessary expertise and knowledge. The pro- necessary to verify and evaluate the assets of the depart-grams will also have the psychological value of helping ment. These subjects have been considered by a teamstaff members to identify with the company and will of financial consultants and accountants appointed byspur them to do their best. the board, who have submitted their recommendations.

A special Finance Committee of the board will consider

Personnel these recommendations and in tum make its own.

Most fears about privatization relate to anticipated Foreign Collaborationproblems in the transfer of personnel, the possibility ofretrenchment, change of conditions, loss of privileges, Foreign collaboration is being viewed as a means byand a sense of insecurity in leaving the built-in guaran- which, after privatization, the company could seek totees of govemment service for the uncertainty of a consolidate itself and obtain the wherewithal needed tocommercial organization. The opposition of trade un- realize its long-term objectives. Foreign collaborationions, inspired by apprehensiveness and instigated by is no ideological sequel or corollary to privatization.union and political leadership, who foresee a loss in The company will understandably need substantial cap-their powers, is a cause for concem. The board fully ap- ital support, inputs of expertise and management, hard-preciates these problems and is meeting them with a ware and technology to further its plans for expansion,twofold strategy. and updating of the system to provide a service of the

First, an offer has been made to pay a pension to desired caliber. As a developing nation already heavilythose whose posts are abolished. This offer is accompa- committed in many sectors and obliged to undertakenied by an invitation to staff members who wish to re- massive programs of rehabilitation, the country will bemain with the company to submit their applications for unable to apportion the resources needed for the pur-employment. Those who do not wish to serve the coom- pose. In fact the reason for privatization is, in a sense,pany will receive severance pay on the existing terms. to relieve the govemment of this responsibility and toThe actual number of persons who will not be retained enable private enterprise to play its part in generatingmay be minimal and could be dealt with adequately by resources. Extemal support may not have been possiblethe company. Political pressure, however, may be if telecommunications remained as a department, inbrought to bear to force the company to rehire all em- view of the misgivings and mistrust in foreign circlesployees and to institute a provision to that effect in the regarding dealings with govemment establishment. Toact. Such a provision could cause govemment prob- that extent privatization was an essential condition forlems, since it would provide all employees with a legal attracting foreign interest.right to employment. Foreign collaboration, or a partnership on the basis

Second, steps are being taken to open an informal of a joint venture with a foreign concem, can of coursedialogue with the trade unions in telecommunications assume one of several different forms, such as a man-to brief them on the course of privatization and to give agement contract; a partnership with major control bythem an opportunity to express their views. The board the foreign partner, such as a lease arrangement; or ahas appointed a group that includes representatives of management consultancy with a foreign agency. Thesethe ministry, department, and Labor Ministry to estab- possibilities fall short on the crucial question of provid-lish continuing rapport with all the unions. This group ing investment, which is a primary requirement of anywill promote an atmosphere of understanding and co- partnership. Sri Lanka desires an arrangement throughoperation for the amicable solution of problems. The which the company can obtain managerial and techni-support of unions is obviously essential for the success cal support on a mutually advantageous basis. There isof privatization and can be obtained through continu- reason to believe that such an arrangement may be at-ous efforts to explain the merits of the change and allay tainable in view of the favorable response elicited byapprehensions. overtures made in 1985. At that time intemationally

The Sn Lanka Experience 105

well-known and experienced organizations were appar- will impede their normal commercial operations.ently interested in the prospect. Collaborators also want freedom from political in-

A joint venture of the kind contemplated is not an terference.unusual feature in modem commercial relationships.The arrangement is very much in keeping with intema-tional partnerships or joint business ventures for mu- Overall Strategytual advantage. The risks in such ventures are known.Unions and partnerships between unequals could bearheavily on the importuning partner and could open the The general plan has two features: the machinery setlatter to exploitation. Where the prospective partners up for the purpose of implementation and the strategyare commercial firms, the danger is that the profit mo- adopted.tive will be of paramount concem and override consid- The machinery that was devised is an independenterations of fair play and cooperation. These idealistic board under a chairman who is the chief executive re-considerations may not be relevant to a company that sponsible for the conceptualization, planning, and im-must convince its board and shareholders of the viabil- plementation of privatization. The board includes rep-ity of its ventures. Hence any collaborative arrange- resentatives of the ministry and department plus seniorment should be spelled out with great caution and public servants who advise the chairman on technicalshould be negotiated carefully. It should be approached and other matters. This provision represents a uniquenot as some idealistic venture but as a hard bargain. approach; in other cases action was taken through bod-Essentially the object should be to strike a fair balance ies constituted within the organization itself in a proc-of interests such that, in return for investments and ess of self-liquidation. The appointment of an indepen-risks incurred, the collaborator could expect a fair re- dent body, however, has the advantage of bringing totum and freedom to operate in partnership without bear an objective point of view so that the board canundue interference. The sensitive areas in such a col- concentrate on the task with single-minded attention,laborative venture are: unencumbered by ongoing departmental or other re-

sponsibilities. The Presidential Commission of Inquiry* Share of management. Some foreign partners de- at one time recommended entrusting this task to the

mand a management contract giving them a free Nrc and proposed that the NrTc be set up through legis-hand to operate the company. If responsibility is lation as a first step. This procedure had the drawbackto be shared, they seek a substantial part of top of singling out one party in the proposed complex andmanagement. vesting it with the authority to design the whole. In

* Tariffs. Collaborators expect to be able either to such an affangement the objectivity of the NTc wouldhave been colored by its own role, and legislation would

deciding on them. have been duplicated in one act for the NTC and anotherfor the transformation. It is difficult to see, further-

* Network expansion and development. Anticipat- more, how the NTc could be set up in advance of theing a commercial undertaking, collaborators will passage of the act sanctioning it. The idea of an inde-be interested primarily in lucrative ventures that pendent body set up by the head of state to mastermindincrease income, as distinct from ventures re- the entire operation was therefore sound and has in-quired for developmental reasons related to over- deed proved its value in practice. The board from its ob-all socioeconomic advancement. On this question jective position has been able to harness all availableof priorities the company and the NTc might dif- expertise in the country and to enlist consultants fromfer. abroad. It has been able to proceed on a time frame of

* Investment levels. A collaborator will be expected its own rather than using one imposed by outside agen-to purchase a percentage of equity and to provide cies. It was also financially independent in that, al-the capital support needed for a long- or medium- though for the modest local expenses of the board it re-term plan of expansion and technological updat- ceived a budgetary allocation, for all other costs, suching. Collaborators' willingness to commit them- as those associated with foreign consultants and theselves and the extent to which they are prepared employment of experts on its staff, it operated on ato do so will be the deciding factors. grant from the World Bank.

* The act and the NwC. Collaborators need assur- The strategy for implementation of privatization en-ance that the act and the NTC will not impose visaged a two-stage process. The first stage encom-undue constraints and restrictions of a sort that passed the drafting of the legislation and the license,

106 Vemon L. B. Mendis

the establishment of the NTc, the incorporation of the ously. For this purpose good leadership is required, andcompany, and the actual operation of the company as the board is hoping to identify and install the top man-a commercial organization. The drafting of the legisla- agement in advance to lead the attack at the appropri-tion and license called for great care and skill to make ate time. The formation of the NTC should be relativelythe system conducive to privatization without merely easier in an institutional sense, but some foreign exper-paying lip service to it. The real challenge, however, tise may be needed at the outset. According to the finalwill lie in operating the company as a commercial un- plans envisaged by the board, at about the time the billdertaking that sheds its stifling bureaucratic anteced- is due for submission to Parliament, all the action com-ents and assumes the spirit of a business venture. The mittees will have rendered their reports, which will beundertaking calls for a veritable human revolution in examined by the board and the recommendations in-motivation, attitudes, perceptions, and values thait can- corporated into a master action program. It will be thenot be attained by mere application of the law. This as- responsibility of the top management to implementpect of the operation, which is the key to its success, this program and to bring the company into being.has engaged the board's serious attention. The board After the company has been launched, formal stepsinitially attempted a gradual acclimation within the could be taken to pursue the question of foreign collab-departnent in the direction of privatization. This oration; however, the board has already received in-softening-up process within the department itself quiries from foreign concerns about the proposed basisunder the direction of the board was really an attempt for collaboration and the terms and conditions ex-to implement a Committee of Inquiry recommendation pected. The board has been informally in touch withthat the board oversee the activities of the Deparlment the interested parties. The formal steps remain underof Telecommunications until the legislation could be consideration but presumably interested parties will beimplemented. The approach proved totally unsuccess- invited to formal discussion with the board. They willful in practice because of the heavy ongoing workload be informed of the company's basic expectations andwithin the department itself and the departnent's re- the tentative terms that will serve as a basis for negotia-sulting inability to lend itself to an advance program tion. Prospective collaborators will presumably wish toof reorganization. This strategy has therefore been send investigating teams ahead to review the existingabandoned, and the board is taking all logistical mea- situation. All facilities will be provided for them to con-sures to effect the organizational changes imnmediately duct such inquiries and to satisfy themselves. No timeafter the transfer. The phased transformation might frame has been specified for this process, but it is hopedhave been better, but perhaps there is equal merit in that talks can be completed in half a year from the timetaking a leap and attacking on all fronts simultane- of their initiation.

14

An Indian Perspective on Sector ReformT. H. Chowdary

Since the invention of the telegraph and the telephone, velopment, was facilitated by rapid advances in technol-it has been conventional wisdom to associate the tele- ogy and by resulting sharp decreases in costs.phone, and more generally the provision of telecommu-nications services, with a natural monopoly. In its Goverment as Sole Providerearly years, telecommunications was not considered anessential part of a country's economic infrastructure.The annual expansion of the telephone network was Today, however, it is increasingly recognized that thererather moderate, and the technology was not sophisti- are disadvantages in having telecommunications ser-cated enough to permit competitive coexistence of tele- vices provided by govemment. The disadvantages relatecommunications networks and systems. to the financing, pricing, development, and regulation

During the initial decades of this century, many cit- of these services. To take the most important example,ies in the United States had several telephone service capital funding for a govemment-run telecommunica-providers, with the result that users had to subscribe tions entity continues to be linked to the govemment'sto several companies to reach every other subscriber. budgetary resources, which in tum depend on govem-These chaotic conditions prompted the government to ment's overall needs and its ability to raise loans andintervene, and under the imminent threat of nationali- to apportion limited financial resources among the con-zation, Theodore N. Vail, president of American Tele- tending and seemingly equally urgent needs of differentphone and Telegraph Company (AT&T), suggested that departments and services. In a capital-limited poora govemment monopoly would be a disaster and a country such as India, the per capita telephone operat-threat to individual enterprise. He proposed, rather, ing expense is about 1.6 times the per capita nationalthat there be territorial monopolies along with some income. In industrialized countries it is about 0.05.form of regulation to limit the potential for abuse and Even if the telecommunications service providers areinefficiency, and that the main objective of these tele- today allowed to go to the market to raise capitalphone monopolies should be to provide a universally through borrowing, as is now happening in a limitedaffordable service of the highest quality. A regulated way in India, the amount, frequency, and terms are de-monopoly was eventually established. termined by the govemment's overall borrowing policy.

More by historical tradition, in Europe and its colo- If, however, these providers were nongovemment cor-nial dependencies the telegraph and later the tele- porations, they would have much more freedom, for ex-phone, telex, and other telecommunications services ample, to market shares and bonds. There is reason tocame to be established by the govemment, which al- believe that consumers in the upper-middle class inready operated the postal systems. In India, for exam- India, who number more than 10 million and can affordple, the telegraph service was provided by a department consunier goods such as color television sets costingseparate from the posts from 1854 until 1914. Since US$1,000, would be prepared to buy telecommunica-World War II even more rapid expansion of telecommu- tions company shares or bonds if, in addition to theirnications services, needed as a result of economic de- share or bond holdings, they were guaranteed the in-

107

108 T. H. Chowdary

stallation of a telephone within two or three years tionalize or privatize the existing manufacturing com-rather than the normal five to seven years. In Britain, panies. Their capacities are limited, and so is the rangefor example, 1.6 million people, along with 220,000 of equipment that they produce. New manufacturingemployees, purchased nearly £4 billion in shares when facilities that could supply the additional requirementsBritish Telecom was privatized. should, however, be privately owned in order to en-

When governments are the sole providers of telecom- hance competition, stimulate talent, improve quality ofmunications services and are also the national policy- production, and bring down prices.makers, the regulators, the main source of funds, and An intermediate step may be necessary to encourageperhaps even the manufacturers of some telecommuni- multiple production. As the sole provider of servicescations equipment, there are apt to be distortions that and as the manufacturer of its own equipment, the tele-victimize customers, such as poor quality of service, communications company is almost alone in its knowl-high costs, and the disproportionate powers of govern- edge of systems and engineering information. New en-ment telephone inspectors. There is a need to catego- trants may have the necessary financing, enterprise,rize the large number of applicants in an attenmpt to and engineering know-how, but they may lack knowl-apply different waiting periods for installation of ser- edge of the systems and standards. It has been proposedvice, a need to restrict transfer of applications to pre- that engineers from the existing company be madevent sale and profiting, and a need to ensure that the available to the new enterprises. In Great Britain, whenperson receiving the service is in fact the original telecommunications were the responsibility of the Brit-applicant. ish Post Office, the latter had a scheme of "approved

employment," according to which its engineers wereRestructuring the Manufacture of Equipmerit deputized to the private producers to help develop

equipment required by the British Post Office. Such asystem is worth considering during the process of re-

In a number of developing countries, the telecommuni- structuring.cations service provider for historical reasons was alsoobliged to set up a workshop to produce some telecom- Competition in the Provisionmunications equipment. In a few countries, including of Equipment and ServicesIndia, these evolved into full-fledged manufacturing in-dustries. During the last thirty to forty years, as thesecountries gained freedom from their colonial rulers, It has been suggested that the following areas of tele-vast technical progress was made, and indigenously communications services are prime candidates for thethriving industries, managerial talent, and investable introduction of competition. In addition to separatingfunds often developed. Their institutes of technology service provision and manufacturing, competitionand management produced and are continuing to pro- could be introduced in several other areas in a countryduce an excellent crop of experts, entrepreneurs', and such as India. Examples of possibilities for equipmentmanagers. Given this development one may question and services competition include customer premisesthe continued need to have the service provider manu- equipment, long distance networks, and cellular mobilefacture some of its own equipment. A service provideT radio telephone service.that also produces telecommunications equipment will,for example, be reluctant to reject equipment that does Custormer Premises Equipmentnot meet certain standards or specifications.

In fact, there is no valid argument for having a ser- There are successful examples of free competition invice provider in the telecommunications sector produce various areas of customer premises equipment, such asits own goods. Electricity boards do not manufacture in the provision of telephones, teleprinters, facsimiletheir own turbines or generators, and transport compa- and data communications equipment, and private auto-nies do not manufacture trucks. In most European matic branch exchanges. Personal computers are al-countries and Japan, the service provider is separate ready able to replace teleprinters, and telephone setsfrom the manufacturer. In the United States, the WNest- can carry voice, keep time, price and answer calls, storeem Electric Company, AT&T's production arm, before messages, calculate, and act as alarm clocks.divestiture supplied some, but not all, of AT&T's equip-ment. Several other smaller manufacturers also sup- Long-Distance Netuworksplied and continue to supply the U.S. market.

In the process of separating the service provision and The increased capacity offered by new means of trans-manufacturing functions, it is not necessary to dlena- mission is making competition possible in long-

An Indian Perspective on Sector Reform 109

distance networks where large bandwidths are available bureaus are operated by private individuals in shops, atfor very high bit-rate data. the airport, and on street corners.

Cellular Mobile Radio Telephone Service Regulatory Agency

As might be recalled, it was the existence of several In the process of degovemmentalization and eventualcompanies with underground cable networks in the competitive sourcing of equipment and services, itsame city that militated against competition. Now, would be necessary to have a competent, high-powered,however, cellular mobile radio telephones allow radio autonomous body to initiate and assist in making thechannels to be apportioned among competing provi- contemplated changes. India's experience in trying toders and to be shared by many subscribers. The mobile bring about a radical restructuring of its telecommuni-telephone is the perfect example of a case in which cations sector has so far not been good. The govern-new telecommunications technology and computers ment's attempts at liberalization, multiservicing of pro-supplant wires as the connection between the user duction, and introduction of computer-derived servicesand the switch. Competition in the provision of this over the telecommunications network have all been de-service has driven down prices and is making it afford layed by a monopolist, centralized, and civil-service-able for ever-increasing numbers of people in many oriented bureaucracy. Several committees, commis-countries. sions, government-initiated national conventions, and

Indian cities such as Bombay, Delhi, Bangalore, Hy- directives to the Department of Telecommunicationsderabad, and Calcutta have an urgent economic need have failed, mainly because the telecommunicationsfor mobile telephones and radio paging. Unfortunately, bureaucracy was not willing to end its monopoly of pol-an attempt to introduce a govemment-run cellular tele- icy formulation, licensing, manufacture, and servicephone service in Bombay and Delhi failed because production and could not be expected to do so.public opinion saw this as a misappropriation of funds Sri Lanka has recognized this impediment to change.at a time when there were more urgent social needs to The president of Sri Lanka has mandated the establish-be satisfied. Indeed, scarce government or telephone ment of a Special Commission of Inquiry to draft legis-corporation resources should not be used to provide lation, to formulate a corporate structure, and to setsuch services, and thus the logical altemative is to li- objectives. The intent is to incorporate and eventuallycense private entities to do so. Because the equipment privatize telecommunications services in one giant stepmust be imported, the idea of foreign joint ventures that wpuld leave no delaying or distorting power in theshould not be rejected. Alternatively, nonresident Indi- hands bf an entrenched civil service (see Chapter 13).ans who are eager to invest their overseas eamings in Although such a mandated body may yet be set upIndia could be licensed to establish the service through in India, there is an immediate need to establish an ob-an Indian company. It is noteworthy that Indians work- jective and independent agency. Institutions such asing in the Persian Gulf alone send home Rs9 billion the Office of Telecommunications in Great Britain, and,every year. to some extent, the Federal Communications Commis-

sion in the United States, could be used as models.Institutions for the Multiple Provision of Services Such an agency would see to it that entry by other pro-

ducers and service providers is facilitated and that theexisting monopoly does not obstruct the new entrants

Telecomnmunications Bureaus unfairly. It would also ensure that the rates charged forservices are fair and that network providers publish

Another means of introducing multiple provision of specifications regarding interface and quality. Thisservices in a country such as India may be achieved by agency would assess the quality of services being of-setting up telecommunications bureaus. When facili- fered, would relate its findings to the rates that the con-ties are in short supply and access to a telephone is diffi- sumers have to pay, and would promote increasedcult, it makes sense for people who have such facilities awareness of telecommunications affairs among theto be allowed to make them available to people who do public and consumers.not have them and to casual users on a bureau basisfor a small fee. In addition to the basic services, such Independent Equipment Approvals Boardbureaus could provide booking, transmission of tele-grams, telephone calls (local, long distance, and inter- When the monopoly is ended, multiple producers andnational), telex, facsimile, and photocopying. In Co- service providers will not automatically appear on thelombo, for example, many such telecommunications scene. The erstwhile monopoly has the network and its

110 T. H. Chowdary

own customer premises equipment to offer. It will not Conclusionsbenignly permit its business, markets, and accounts tobe eroded. The monopoly cannot be expected to judge In this chapter I have reviewed some of the forces ofand pronounce on competitors' equipment objectively, change that have been sweeping across many parts ofbe it telephones or private branch exchanges, and the world. I have critically examined areas of telecom-hence an independent approval board for telecommuni- munications such as manufacturing, policymaking,cations equipment is needed. In Great Britain, for ex- regulation, and the provision of service and equipment.ample, delays and obstruction in British Telecom's ap- In these areas, I suggest, the introduction of some re-proval of its competitors' equipment led to the structuring and competition could benefit not only theestablishment under the Department of Trade and In-. . . ~~users but also the population as a whole. If we takedustry of an absolutely independent body known as the India as an example, possible means of proceeding withBritish Approvals Board of Telecommunications. such restructuring include: privatization and the intro-

Staff Considerations duction of competition in manufacturing; the introduc-tion of some competition in the provision of equipment

Government monopolies are becoming increasingly and services such as consumer premises equipment,captive to politicized worker unions. The ncreasingly long-distance networks, and cellular telephones; the es-capve o pliblze wokerumos. necustomer Is tablishment of private telecommunications bureaus;often forgotten. Competition would ensure the diminu- a tablishment of a regulatory ageandtion of monopoly labor's threat to service, costs, and

,- . . . , . , ~~~~~~an equipment approvals board. Although these mea-efficiency. The opportunity to own shares in the compa- sunies could gradually win over the employees to the sures may appear modest to some observers, they docompanies' point of view and encourage them to be merit further consideration as first steps toward sectormore responsible. Govemment corporations should reform.ioffer employees preferential and attractive share op-tions, which are certain to be popular, as the BritishTelecom experience has shown.

15

The Initial Experience of theMetropolitan Telephone Corporation of India

M. P. Shukla J

India has made considerable progress in telecommuni- obsolete and worn-out. Replacement was imperative,cations since its independence in 1947. In absolute but because of lack of funds and heavy pressure to ex-terms the number of telephones increased from a mere pand services this need was ignored and network qual-80,947 to about 4 million at present. All important ity deteriorated.trunk routes, which once used overhead wires, are now Other factors responsible for the poor quality of theconnected by UHF, VHF, microwave, coaxial cable, and network included failure to provide an undergroundsatellite media. Telephone exchanges, once mostly cable duct system, lack of pressurization of under-manual, have been largely replaced by electromechani- ground cables, and use of low-grade and unreliablecal and electronic exchanges. In the production field jointing kits and terminating devices. Again, financialthere were no manufacturing facilities for telecommu- constraints were to blame.nications equipment at the time of independence. Now In order to make improvements and to upgrade thethere are a number of manufacturing units in both services significantly, the government of India consid-the government and private sectors. These develop- ered various administrative options and decided to formments notwithstanding, India still lags behind many a public limited company to manage the telecommuni-developed nations both qualitatively and quanti- cations services of Bombay and Delhi. The new govern-tatively. Whereas other nations have entered the ment corporation is called Mahanagar Telephoneinformation age and have a host of information trans- Nigam Limited (MTNL). It resembles any other gov-fer facilities, India is still expanding and improving emment company in autonomy, flexibility, powers,the basic voice telephony to reach every comer of the responsibility, accountability, and so forth. The corp-country. oration is wholly owned by the Department of Telecom-

munications of the govemment of India. It has been

The Need for Change: charged with the responsibility of managing all the tele-Formation of a Telephone Corporation communications services in the two metropolitan cit-ies except for the manual telegraph services. It can also

raise funds from the market for its own use as well asAs a result of economic constraints and competing de- for the Department of Telecommunications. The newmands, the telecommunications sector in India occu- corporation began operation on April 1, 1986, under apied a relatively low position on the list of national pri- license granted by the Department of Telecommunica-orities, and investment in this sector over the tions.successive five-year-plan periods has been rather low.The telecommunications sector, like the energy sector, Public Opinion about the Fonnation of the MTNLneeds very large investments to finance expansion andreplacement. In the absence of large investments, not Telecommunications in India has been a governmentonly did expansion suffer, but replacement was impos- monopoly. The move to convert a part of the telecom-sible even though equipment and material had become munications network into a limited company attracted

111

112 M. P. Shukila

considerable interest in the country and differing views Linitations and Restnctions on MTNLwere expressed about the efficacy of the organizationalchange. Some people regarded a complete shift to the Because the MTNL controls only a portion of the totalprivate sector as a panacea. Others believed that the network of India, its actions must comply with pre-changeover from a govemment department to a gov- vailing practices in the rest of the country in certainemment company was merely old wine in a new bottle. respects:The latter group expressed serious reservations aboutthe change, particularly when existing personnel were * Th'e MTNL has no authority to change any of theretained, and suggested bringing in management ex- existing tariffs on services. The power to changeperts and engineers from outside to effect the necessary the tariff rests with the govemment. Even if ashift in management style. service is entirely new, the government will de-

Extensive press coverage and publicity inflated public cide the tariff.expectations. After the formation of the MTNL, hundreds * The Department of Telecommunications must ap-of thousands of telephone customers in Bombay and prove proposals related to market borrowings.Delhi began watching for results, and millions of eyes * The MTNL cannot borrow intemationally; only theprepared to track the corporation's performance iin the govemment is permitted to do so.years ahead. * The Department of Telecommunications must

clear and release all of the MTNL'S foreign ex-Powers of the MTNL change requirements.

The Department of Telecommunications must ap-he MTNL is govemred by the Companies Law and has prove expansion of the network where switching

certain powers: equipment is concerned.

0 The Department of Telecommunications has spe-cial agreements goveming the supply of equip-

3 It can make its own decisions regarding economic ment and materials from the govemment manu-investments. facturing companies, namely Indian Telephone

* It can mobilize its own financial resources either Industries Limited, Hindustan Cables Limited,by market borrowings or by lease financing. and Hindustan Teleprinters Limited. The Depart-

* It has financial powers to undertake expansion ment of Telecommunications regulates the MTNL'sand replacement to upgrade service quality. procurement of materials from these three com-

* It has full financial autonomy in day-to-day func- panies.tions. * The Department of Telecommunications must ap-

* It can make its own development plans, but ex- prove new equipment, materials, and technologypansion must be balanced against the overall to be used by the MTNL.

availability of the telecommunications network in * The Department of Telecommunications must ap-the country. prove any import license for new equipment, even

* It has the power to sanction projects up to Rs200 though the technology and equipment have al-million; for larger amounts, govemment sanction ready been approved for use in the MTNL.

is needed. * The MTNL can adopt no new policy in the matter* It has the power to procure all materials and of allotment of telephones to various categories of

equipment, subject to certain limitations. subscribers; the allotment rules applicable to the* It can frame its own rules of management: and rest of the country will apply to the MTNL.

procedures for operation and maintenance. * The MTNL must follow all administrative instruc-* It can frame its own service conditions and wage tions issued by the Department of Telecommuni-

structure for its employees, fix productivity cations.norms, and introduce incentive schemes and * The MTNL has taken over assets and liabilities onplans to motivate staff. an "as is" basis. All staff working in Bombay and

* It can recruit its own staff and offer appropriate Delhi must be treated as being on deputationtraining in training centers that it establishes. without any deputation allowance. All the service

* It is authorized to delegate its powers to subor- conditions and the wage structure must be thedinate agencies to improve efficiency and per- same under the MTNL as under its predecessorformance. agency until the staff has been absorbed into MTNL

Metropolitan Telephone Corporation of India 113

service. The MTNL has no power to discharge ca- phasis, MTNL took several actions early. It held a num-sual labor. ber of Mfeetings with business and consumer organiza-The government will decide about the absorption tions to assess public opinion in Bombay and Delhi withof staff in MTNL service. The MTNL will have no regard to expectations and priorities.power to negotiate service conditions until the ab- It studied the network deficiencies in order to formu-sorption process is complete. late a plan of action to improve network performance

substantially. And it engaged a few expert organizations

Objectives to study and recommend ways of improving customerservices. The areas identified included:

Within the broad framework of its mandate, the MTNL * Fault repair servicedefined its aims and objectives as being: * Billing and associated problems, such as collec-

* To upgrade the quality of service and to build a tion, disconnection of accounts in arrears, recon-high degree of customer confidence nection following payment, complaints regarding

* To give the public considerably greater accessibil- excess billing, and so forthity to the telecommunications network not only * New installations, shifts, and related items suchby providing a larger number of new telephone as requests for new service, the issue of a workconnections but also by providing a large number order when a connection is released, the checkingof local and subscriber trunk dialing (STD) public of signatures, cases of technical nonfeasibility,call offices (Pcos) and so forth

* To mobilize necessary financial resources for the * A system for handling customer complaintsdevelopmental needs of the MTNL and also for the * Management of records and equipmentDepartment of Telecommunications * The designing of an incentive scheme for the staff

* To provide the new telecommunications services of the national and intemational trunk manualneeded by the business community and by public exchangesadministrations 3 The redesigning of organizational structure to im-

* To invest in human resource development to up- prove productivity and effectiveness significantlygrade staff skills and to introduce a new culture proeroductivity ande e eness s antly- . , , , , ,w,, ~~~~ 5omputerized material management to make ma-and new attitudes to the workplace. The corpora-

tion mst shit fro the cnceptof telphoneterials more readily available and to reduce inven-tion must shift from the concept of telephone tory costs to the barest minimumsubscribers to that of telephone customers and tr ot otebrs iiusubstteach the staff to expect the customer to * The standardization and introduction of compu-must tahtesaftexettecsoetoterized project formulation, project execution,lead the way. Staff members must lose their civil project fommuland rofect petionservice orientation and must come to regard project monitoring, and release of completionthemselves as customer-oriented public service reports.employees. The first step is reinforcement of theconsumer-oriented approach in place of the rule- Areas of Emphasisoriented approach.

Various areas demanding attention were identified, and

Plans of Action in each case appropriate action was specified. In thecase of underground cable faults, which occur too fre-quently because of repeated digging by utilities and

In view of the country's overall financial resources and construction crews, a large-scale underground conduit,particularly its foreign exchange reserves, there is no or duct, system is planned for completion in five years.possibility of large-scale technological change, replace- An estimated 1,000 route kilometers will be needed inment of old and worn-out telephone exchanges and Delhi and 1,500 in Bombay. The program has alreadyother material, and importation of new digital ex- been launched.changes and material. By the same token, the MTNL Frequent handling has caused repeat faults in cablecannot afford to ignore the call of the staff unions, or distribution points, which result in loose connections.for that matter the demand of the people of India, par- Again, a five-year plan was launched to provide insu-ticularly in Bombay and Delhi, that there should be no lated disconnection-type modules in both cabinet pil-staff cutbacks. Iars and distribution points, with high-grade materials

In order to identify strategies and areas needing em- and weatherproof boxes, and to replace all rotten, trou-

114 M. P. Shukla

blesome, and wom-out old modules. Again, work has Table 15-1. Improvements in Telecommwurcationsstarted. Services, 1986-87

Another five-year project seeks to eliminate excessivefaults by replacing all old subscribers' loops with steel Iten 1986 1987copper-coated Pvc insulated drop wire with short spans, Faults per 100 lines a monthusing high-grade drop wire accessories, and by replac- Bombay 31.2 16.4ing all rotten and faulty house fittings with standard Delhi 34.9 24.1wires and fittings. The survey and planning stage has Call completion ratebeen completed, and work wil! soon begin. Bombay

Many of the telephone sets in use are old, worn-out, Local 91.8 92.7unreliable, and difficult to maintain. They are responsi- STD' 28.0 58.1ble for a large number of faults, repeat faults, and con- Delhisequent poor service. The work of replacing all such Local 79.1 93.4sets with highly reliable electronic push button tele- STD' 33.5 59.0phones has already started and is scheduled for cornple- Percentage of effective trunk calls

tion in th-ee years. ~~~~~~(manual)tion in three years. Bombay 69.2 74.8Old, wom-out Strowger and Pentaconta cross-bar Delhi 62.9 714

exchanges give rise to a large number of wrong num-bers, cross-connections, held-up faults, no-connection a. sTD = subscriber trunk dialing.

faults, and so forth. Replacement of all deteriorated source MahanagarTelephone Nigam Limitet (NL), AnnualStrowger cross-bar exchanges is planned for cornple-tion by 1991, with replacement of Pentaconta cross-bar exchanges to be finished by 1996. other problems); and delay in providing information

The call completion rate is poor for both local and about the position of trunk calls. To improve the situa-STD calls because of traffic congestion within thie ex- tion, action has been started to procure digital trunkchange, interexchange junction equipment, and poor manual exchanges for computerized operator positionstraffic handling by Pentaconta cross-bar, tandem, and and automatic billing. Plans are also being made to pro-trunk automatic exchanges. These exchanges will bhe re- vide as many operator-dialed circuits as possible, to in-placed by electronic stored program controlled I(spc) troduce an incentive scheme for increasing productiv-digital automatic exchanges. Task forces were set up in ity, and to start a large number of training andBombay and Delhi to study and take remedial action motivational programs to create a new work cultureagainst the problem of traffic congestion and mainte- and change staff attitudes. Finally, an effort is beingnance of interexchange junctions and associated equip- made to improve working conditions, transport facili-ment. ties, dormitory space, and so forth to increase staff pro-

Still another problem relates to the many complaints ductivity.dof excess billing and to popular demand for more de- An incentive scheme was needed for the staff of thetailed accounting for long distance calls. The solution national and international trunk manual exchanges.is the installation of automatic message accounting sys- The MTNL had appointed an expert agency, Nationaltems for electromechanical and analog exchanges. Productivity Council, which designed an incentiveEquipment has been ordered and will be in place by De- scheme that has now been introduced. Improvementscember 1988. In digital electronic exchanges, suc]h fa- are evident as a result of this incentive scheme andcilities are already available, and about 100,000 tele- other measures taken; see Table 15-1.phone connections in Delhi and Bombay are covered by In trunk manual exchanges and special services thatdigital exchanges for which detailed bills are being pro- are totally operated by women, absenteeism on somevided. days reaches 40 percent and is normally about 30 per-

The service provided on manually handled trunk cent. Leave reserve, in accordance with the rules, iscalls has some drawbacks that affect the efficiency of only 10 percent. Absenteeism is a problem chiefly atthe system: delayed response from trunk booking and night. Foundation of Organisational Research, an ex-trunk assistance during night hours (caused by heavy pert agency appointed by the Mm?L to recommend waysabsenteeism on the part of female staff); delay in put- of solving the problem, completed its report and sub-ting through trunk calls (a result of too many calls per mitted it for consideration. The mmNL is now studyingposition, a low number of trunk circuits, faults in trunk the recommendations.circuits, low productivity of telephone operators, and Procedures and rules were found to have become

Metropolitan Telephone Corporation of India 115

more irritating than helpful to subscribers, particularly Human Resource Developmentin such areas as repair service, billing, collection of pay-ments, disconnection and reconnection of service, new Prior to the formation of the MTNL, there was no spe-installations, shifting, requests for new service, issue of cialized division in Bombay or Delhi concerned withwork orders, checking of signatures, and the manage- personnel management and industrial relations. Per-ment of records and equipment. Tata Consultancy Ser- sonnel policies and rules affecting the staff and staffvices, an expert agency appointed by the MTNL, investi- welfare were made by the Telecommunications Directo-gated the problems and its report is now being rate of the Ministry of Communications. All matters ofreviewed. policy and new items were sent to the ministry for deci-

Organizational and structural changes are needed to sion. Now the Personnel and Industrial Relations Divi-increase productivity and effectiveness. At the request sion, a separate entity, has opened at the corporate of-of the MTNL, the Administrative Staff College of India fice of the MTNL. This division is being strengthened inin Hyderabad analyzed the problem and recommended the Bombay and Delhi units so that none of the prob-changes that will soon be implemented. lems must be referred to the ministry. All matters per-

Materials are often not available when they are taining to personnel management and industrial rela-needed, and the inventory costs associated with materi- tions must be decided and settled by the MTNL. MTNLals is huge. In this area, the Indian Institute of Manage- framed its own rules and service conditions for thement, appointed by the MTNL, has made recommenda- staff, and a number of management and industrial rela-tions and has begun implementing them. Work is tions modules have been introduced.expected to take about one year.

A large-scale program has been launched to comput- Personnel management modules. Modules for vari-erize the following telecommunications administrative ous subunits in the two units of Bombay and Delhi haveservices: been made. The main objectives of these modules are

Directory inquiry greater centralization, definition of the role of eachMaterial management functionary to the lowest level, definition of the powerStaff pay billing and responsibility of each officer and supervisor, com-Subscribers' records and commercial working munication with employees so that they understandSCable records fully the 'productivity and efficiency expected of themSubscribers' line management as well as the career growth and benefits that they maySubscribers' inventory anticipate, and monitoring of the system.Personnel records and their management Personnel data bank. The personnel management in-Computerized library formation system will interact with the personnel dataComputerized receipt and dispatch of letters bank and with the manpower planning, training, andComputerization of land-based data and maps performance appraisal subsystems.

Since all activities cannot be computerized simulta-neously, the MTNL has adopted a modular approach for Industrial relations. Modules are being used to man-implementation. After some activities have been com- age staff relations in connection with grievance proce-puterized, a total management information system will dures, performance appraisal and counseling, and thebe developed. Not all of the work is being done in- career progression of employees.house; the MTNL has engaged a number of softwarecompanies. Finance and Accounts

Also needing attention are the formulation, execu-tion, and monitoring of projects and the release of com- The biggest difference between an autonomous bodypletion reports. A number of tasks that are repetitive such as the MTNL and its predecessor, the Departmentin nature call for the development of a computer pro- of Telecommunications, appears in the field of financegram that will make it possible to complete jobs easily and accounts. The most striking features of the shift areand on time without cost overruns. Inventories and the following:staff must also be kept to a minimum. Engineers India,Ltd., a specialized expert agency, has been engaged to * The telecommunications accounts in Bombay andcomplete this work. As these examples indicate, the Delhi with the Reserve Bank of India, which is theMmNL is taking a fresh look at every chronic problem treasury bank or controlling bank, have beenand is trying to find solutions. closed, and accounts have been opened in other

116 M. P. Shukla

banks, so that the MTNL is on its own insofar as Operation and Maintenancefinances are concemed.

* The MTNL is now free to borrow from the market To solve chronic problems in such areas as the repairby resorting to bond issues, and if necessary the of faults, grievance handling, billing and collection, theMTNL can arrange for lease financing. installation of new connections, shifts, public interface,

* Company accounting, rather than government and operations generally, the MTNL has been able to en-accounting, will be used, and the MTNL will bear gage a number of specialized agencies, as mentionedfull responsibility for profit and loss, above. Corrective actions are already being undertaken.

* Bills must be paid at the banks rather than 'at the In addition, the changeover makes it now possible topost offices, and the MTNL must keep track of the monitor the various parameters closely.finances on a day-to-day basis. Finnce and Accounts

Factors Contributing to Higher Productivity The MTNL floated telephone bonds (nonconvertible de-and Efficiency bentures) at an interest rate of 14 percent and income

tax free at 10 percent. The response was very good.Against an'issue of Rsl.5 billion, the MTNL was able to

The MTNL has a certain amount of flexibility, autonomy, collect Rs3.84 billion, and the govemment permittedand power because it is a public sector company (corpo- the MTNL to keep all of the revenues.ration). These characteristics can contribute to greater The financial and accounting organization has beenprogress and results in some areas. given a professional touch thanks to the employment

of experienced chartered accountants. In addition,Planning and Project Execution commercial accounting has been introduced, and the

use of financial resources has been optimized. TablesThe planning process for development in the two cities 15-2 and 15-3 report operating results and ratios, re-has been streamlined, and projects within the scope of spectively.the MTNL's authority have been speedily outlined andauthorized. The planning norms for such items as ma- Human Resource Developmentterials required for the extemal plant network, the pro-vision of junction equipment, and the distribution of The major task demanding attention before the MTNLswitching equipment in different exchanges vary from was incorporated was the upgrading of the technicalcity to city, and the norms fixed by the Department of skills of personnel and the instilling of a new work cul-Telecommunications are therefore not applicable in all ture and attitudes toward the customer. As notedcases. For this reason the MTNL has fixed its own norms above, the MTNL organized specialized divisions in itson the basis of local conditions. corporate office as well as in the two units at Bombay

The MTNL now has the power to acquire land, to con- and Delhi for the management of personnel and indus-struct buildings, to prepare the cable network in ad- trial relations and is introducing various managementvance, and to procure materials in a timely fashion. modules. The experts brought in to train the staff, in-These capabilities are contributing to the speedier exe- troduce a new work culture, and change attitudes havecution of projects. In addition, the MTNL has engaged already done some work, and the big task is proceedingan expert agency to develop computer programs to han- in an organized manner.dle highly repetitive tasks. All questions pertaining toviability and financial return are now easily answered. Suggested Measures for Privatization

Almost all projects have been completed well in ad-vance. Not only have there been no time or cost over-runs, but additional revenues have been earned. Time- India's experience indicates that various measures helply authorization in financial matters, the ready availa- in the full or partial conversion of any govemmentbility of materials, machines, and instruments, and the agency into a corporation or a company.use of contractors have all expedited the execution of Long before the corporation is formed, an organiza-projects. The MTNL has been able to arrange in ad- tion should be created to finalize all service conditions,vance for architectural designs, the construction of the wage structure, promotional schemes, absorptionbuildings, and other utility services so that projects conditions, amenities to be offered, and so forth. Onceare not delayed because adequate building space is the corporation has been formed, it can then exerciselacking. full control over the staff, and all schemes can be intro-

Metropolitan Telephone Coioraton of ind&a 117

Table 15-2. Operatin Results Table 15-3. Indicators of Operating Effidency

Rupees ndicator PemretItem (thousands) Operating ratio 67.23Income Rate of return onTelephone 438,15,35 net plant in service 19.56Telex 66,25,64 Operating profit/sales 32.76Circuits 26,99,59 Cross profit/net sales 34.45Other sources 34,42 Profit before tax/net worth 18.55Subtotal 531,75,00 Net profit/paid-up capital 22.75Other income 8,94,87 Net profit before tax/sales 25.67Total income 540,69,87 Sale per employee (rupees) 81,807Expenditure Net profit before taxCharges for use of per employee (rupees) 21,003

national network 124,37,05 Source. mm, Annual Record, 1986-87.Depreciation 97,80,35Other operational

expenditure 135,32,24 sion; in almost all areas, the corporation should be em-Interest 46,67,91 powered to decide.Total expenditure 404,17,55 Bore to cide.Profitbefore tax 136,52,32 Before the corporation Is actually formned, there

income tax - should be many seminars to prepare the staff for theNet profit 136,52,32 transition. These seminars should explain the reasons

Source- mm, Annual Record, 1986-87. for the transformation, its objectives and goals, the ad-source: MTnL, Annual Record, 1986-87. vantages from the staffs point of view, and the antici-

pated improvements in service. The staff should be per-suaded that the formation of a corporation will benefitboth the employees and the public. It should be thor-

duced simultaneously so that the full effect is seen at oughly understood by the staff that, with the formationonce. of the corporation, employees will increasingly partici-

The govemment should interfere as little as possible pate in the decisionrmaking machinery. A system ofwith the solution of staff problems. As few matters as awards and rewards can easily be introduced after dis-possible should be referred to the govemment for deci- cussion with staff unions.

16

Meeting the Challenges of Privatization in MalaysiaDaud bin sahi*

The wind of privatization that has been sweepiing Before January 1, 1987, the telecommunicationsthrough Britain, Japan, and Europe started to blow in business in Malaysia had been operated by JabatanMalaysia in 1982. Today privatization stands as a major Telekom Malaysia (Telecommunications Department ofpolicy instrument by which the Malaysian govemment Malaysia), a government department reporting to theseeks to achieve fiscal, economic, and sociopolitical Ministry of Energy, Posts, and Telecommunications.objectives. Jabatan Telekom Malaysia, being a govemment depart-

Effective January 1, 1987, the telecommunications ment, was also entrusted with certain regulatory func-scene in Malaysia changed in the legal and corporate tions covering the telecommunications business insense with the transfer of the telecommunications Malaysia.operating functions to Syarikat Telekom Malaysia, a The need to reform the mode of operation of the tele-wholly owned govemment company incorporated in communications operating body was initially felt someaccordance with the Companies Act of Malaysia. The fifty years ago. As early as 1931 there were calls forprivatization of the telecommunications operating changes in the form of the operating body. In 1949 andbusiness is the single largest privatization exercise 1960, serious suggestions were made to convert theundertaken to date by the Malaysian govemment. Be- Telecommunications Department into a public utilitycause telecommunications has a pervasive influence on with an independent board of management. These sug-individuals, corporations, and the govemment, the per- gestions, however, did not result in legislative or ad-formance of this company has attracted wide attention ministrative action.and critical comment. In January 1971, in line with the World Bank's rec-

ommendation, the govemment treasury accountingBackground to Privatization system practiced within the Telecommunications De-

partment was replaced by a commercial accountingsystem modeled on that used by the Australian Post

The first government body to be privatized was the Office. This step can be regarded as the commerciali-Klang Port Authority. The nature, size, and scope of zation of telecommunications operations, which facili-this body's operations favored its speedy privatization. tated evaluation of operations from a commercialThis exercise also gave the govremment valuable experi- as well as a public service perspective. Under the newence in coping with the range of issues that require res- system the annual budget of the department wasolution in the privatization process. At the same time, tabled in Parliament for approval, and the annualthe privatization of telecommunications services was report, complete with the profit and loss and balancebegun. The complex nature, wide scope, and size of tele.. sheet statements, was published for public informa-communications operations, however, demanded cau- tion. Orderly allocation of resources and comparisontion, care, and thoroughness in formulating and imple- of the body's performance, particularly financial per-menting the privatization plan. formance, with that for previous years and with that

118

Meeting the Chalenges of Priatizaton in Malaysta 119

of other operators in the same business thus becamne needed guarantees that their contractual rights and thepossible. operating body's obligations would be preserved.

The decisive impetus for privatization came in 1982, A very important factor in launching the successorwhen the government recognized that the direction company was the interests of 28,724 personnel. A mu-and size of government spending needed change. The tually acceptable formula was needed to attract and re-govemment therefore began to reconsider its large and tain for five years as many of the personnel as possibledirect role in promoting economic growth and consid- from the government operating body so that the suc-ered altemative means of achieving the desired national cessor company could function as a viable going con-economic goals with greater efficiency. In promoting cem. For ethical and legal reasons, the govemmentthe economic and political concept of privatization, the decided against transferring without option the govem-govemment expressed in clear terms the objectives ment staff employed by the Telecommunications De-involved: partment to the new operating company. Except for

102 personnel who were assigned to the government* Reduce the financial and administrative burden regulatory authority, the employees were given a

of the govemment and simultaneously reduce choice. Fortunately, 28,364 staff voluntarily decided tothe size and presence of the public sector in the accept employment in the new company.economy The legal framework for the incorporation of the

* Promote competition and increase efficiency and telecommunication operations was established and theproductivity interests of the affected groups secured through the

* Stimulate private entrepreneurship and promote amendment of two existing acts and the enactnent ofeconomic growth a new one. The Telecommunications Act of 1950 was

* Achieve the objectives of the new economic policy amended through the Telecommunications (Amend-(NEP) ment) Act of 1985, which reformulated Jabatan Tele-

kom Malaysia as the government regulatory authorityThe govemment recognized that in the privatized envi- and defined its functions and powers for the regulationronment the telecommunications business would need of operators of telecommunication services licensed byto be supervised in the interests of the industry, the the minister of energy, posts, and telecomnunications.economy, and the public. As in the case of privatization The Pensions Act of 1980 was amended through thein other countries, a separate government regulatory Pensions (Amendment) Act of 1985, which made spe-authority was established. cial provision to preserve the retirement benefits of staff

members whether they chose to retire or opted to join

Incorporation of Telecommunications Operations the new operating company. The TelecommunicationsnService (Successor Company) Act of 1985 enabled thenew operating company, called Syarikat Telekom Ma-

Once the decision to privatize had been reached, the laysia, to assume the telecommunications operatinggovernment undertook the necessary legislative and ad- business together with the assets and liabilities of theministrative actions to launch the successor company. forner Telecommunications Department. It also stipu-In so doing, the govemment found it essential to take lated that the successor company should offer the staffinto account the interests of the various parties that terms and conditions of employment no less favor-served and were served by the operating body's prede- able than those of the Telecommunications Depart-cessor. The essential role of telecommunications in the ment. Other provisions were made by the governmentsocial, economic, and national scene called for special through administrative means to enable the new opera-consideration of their specific interests. ting company to function as a viable concern.

Customers and users, for instance, needed assur- The entire legal and administrative process that hadances tat there would be continuity in service and that been undertaken and completed up to December 31,ftere would be safeguards against unilateral monopo- 1986, provided for the incorporation and eventual di-listkc price adjustmeents. The government itself wanted vestment of the teleconmnunications operating busi-to ensure that national security needs would continue ness. Only the incorporation phase of privatization,to be met in a secure manner and would be given high- however, was actually implemented on January 1, 1987.est priority. Suppliers of funds needed guarantees that In a strategic sense incorporation represented a conve-fteir legal position was secure and that financial bene- nient intennediate stage that facilitated the strengthen-fits accruing to them would be preserved in the succes- ing and maturing of the company and paved the waysor company. Similarly, suppliers of goods and services for early divestment.

120 Daud bin Isahak

Consolidating the Enterprise ulates that a certain percentage of the yearly capitalinvestment should be channeled to expand specificcommunity services, such as rural services, which are

In the commercialization phase mentioned earlier, the not viable from a purely commercial viewpoint. Tariffsbudgeting process and the representation of the finan- for basic services as well as basic standards of servicecial results of operations were modified to follow ac- are regulated. The govemment, of course, is exercisingcepted commercial practice. The goals, strategies, pro- its ownership rights and is discharging its responsibil-cesses, outputs, and personnel motivations, however, ity to consumers and the nation as a whole. These influ-remained an integral part of the overall govemment es- ences and regulations will therefore remain unavoid-tablishment and did not undergo transformation. But able facts of corporate life.these essential elements also need to be transformed if Syarikat Telekom Malaysia needs to overcome hur-incorporation is to be meaningful and successful. It has dles and constraints peculiar to the Malaysian scene tobecome very clear that the change in the legal andl cor- satisfy expectations. The human resources that theporate form of the telecommunications operations company inherited had been molded and directed withmust be accompanied by radical changes in the total a concem for public service. Transformation of theseenterprise and the manner in which the company con- resources for work in a business-oriented manner re-ducts its business. Since incorporation the nature and quires the progressive introduction and adoption of andimension of the task of enterprise transformation have enterprise culture. In the organizational sphere, therebeen made clear by identifying the expectations of the is the need to change the structure and managementstakeholder and relating them to the strengths and system so that the company has the proper frameworkweaknesses of the company. The stakeholder is the to progress as an enterprise. Steps have been taken togovemment, which has a dual capacity as both owner create a new organizational framework and to developand guardian of the interests of the public, the users, the human resources, but results will unfortunately notthe staff and staff union, and the suppliers of funds, be visible immediately. To accelerate the organizationalgoods, and services. transformation, extemal inputs and assistance have

In a general sense, incorporation has created excite- been sought whenever intemal expertise is in shortment and high expectations that have been motivated supply or absent.to some degree by wide media coverage. It is regarded The financial performance is constrained by factorsas the solution to all the past problems and as the start that are controllable only to a limited degree in theof a new order in telecommunications. The govem- short term. Personnel that the company inherited, forment, the users of the services, and the general public example, cannot be trimmed for a five-year period.now expect substantial improvement in the quality and Network growth had been planned on the basis ofcharacter of customer services and in the manner in Malaysia's high growth experience in the early 1980s.which the personnel regard and perform their func- The sluggish growth of the economy in 1986 and 1987,tions. The government as the owner expects an im- however, left the company with a sizable unused net-provement in financial performance so that profits from work capacity, which will markedly affect the balancethe divestment of a portion of its equity holdings in the sheet in the form of depreciation.company can be realized early. Even before incorpora- New management and business ideas are beingtion became a reality, management was aware that adopted in response to the new expectations, new andthese expectations would be a natural consequence of existing opportunities, and internal weaknesses. On thethe change in the environment, both internal and ex- conceptual level the company has developed a frame-temal, in which the company now operates. The expec- work that addresses and links the enterprise goals intations in effect focus on the results or outputs desired the critical areas of marketing and finance with the in-by the stakeholders. They have become benchmarks ternal performance goals in the network and organiza-against which the performance of the company, man- tional spheres. It is developing strategies to ensure thatagement, and staff will be continuously measured and with regard to performance the marketing, finance,discussed. The pressure for change is urgent because network, and organizational spheres mutually reinforcethe stakeholder has become impatient to see its ex- each other and guarantee dynamic corporate growth.pectations met. As a practical step, business planning at the corporate

In the present corporate mold, the company is open and lower levels is based on these management andto government influence and regulation. The govern- business concepts.ment's concurrence is necessary for major decisions af- In addressing stakeholder expectauins, there is thefecting the enterprise. The operating license itself stip- danger of focusing excessively on short-term objectives

Meeting the Challenges of Privatization in Malaysia 121

to the detriment of long-range goals. The corporate Preparing for Divestmentstrategy adopted must address both the short-term na-ture of the expectations and the long-range goals in amanner consistent with the objectives of incorporation. The authorities responsible for the approval of publicBriefly, the corporate direction being taken by the com- listing of shares will evaluate the company on the basispany is the following: of its viability and profitability, its quality and capability

of management, its suitability for listing, and the inter-* The company is committed to stimulating and est of the investing public. The performance of the

supporting growth in the information industry company in the market and in the financial sense willwithin the overall framework of national eco- be of key importance for divestment in the context ofnomic growth. privatization. To ensure early divestment, the com-

pany's strategies for the market, finance, network, and* The core business is the transportation and distri- organization will be tuned to achieve results and to en-

bution of all forms of information by means of the sure a continuous fit between strategies and goals.electronic media. The company will continuously The government objectives of privatization includedevelop its distinctive competences and advan- liberalization and some degree of deregulation. Thetages in the marketing, organizational, and tech- company is already operating in an environment of lib-nological spheres to defend, stimulate, and capi- eralization in terminal equipment. It has adjusted totalize on growth opportunities. this situation and therefore does not see further libera-

lization in terminal equipment as a threat to its marketDuring the medium term the company will or its financial performance. A complementary relation-focus its energies and strengthen its organization ship already exists between the company and the ven-and capability to overcome the effects of in- dors of terminals.herited constraints an: improve market and finan- In the sense that liberalization will introduce compe-cial performance to the satisfaction of the stake- tition, it will pose a different challenge. The enterpriseholders. culture needs to be geared to accept the inevitability of

competition and to develop a keen competitive spirit.The current strategy to improve marketing and finan- Fortunately, the government recognizes that the mar-cial performance covers three areas: the improvement ket is too small at the moment to realize improvementof organizational productivity, the improvement of cus- in economic efficiency through the introduction of newtomer services, and the generation of additional reve- entrants. It might be argued that the competition-freenues with the available unused network capacity. Spe- climate promotes complacency, but as explained ear-cific strategies are being defined on an urgent basis in lier, the pressure of stakeholder expectations and thethese areas. The success of the strategies will affect the sharpened awareness of responsibilities have generatedscheduling of the final phase of privatization, which is internal responses intended to satisfy the customersdivestment. and the other stakeholders.

I

Part IV

Conclusion

17

Alternatives for the FutureRichard D. Stem

There is clearly a consensus that profound changes are tion, whether welcome or not, will be the reality fromaffecting the telecommunications sector. They are af- now on. Competition in terminal equipment is a realityfecting the developed countries, the developing coun- virtually everywhere. The same is generally true fortries, and the newly industrialized countries alike. By value-added services. Large users, who have the optiontheir nature the technological changes, coupled with of providing their own services, are also effectivelythe emergence of world markets, suggest that telecom- competing, or threatening to compete, with the publicmunications is in the middle of a revolution, whether or private telecommunications monopolies. The onlythe sector is ready for it or not. Although the changes issue with respect to this competitive reality is whetherwere evident several years ago, the critical actors, in- govemments decide to put some order into the processcluding many users, operators, and govemment policy- and exploit its potential benefits or whether they merelymakers, did not agree about their fundamental nature. acquiesce and thus risk forgoing major potential bene-The current consensus on the nature of the revolution fits to society.is a major change. Although they acknowledged this reality, the partici-

There is also agreement that the provision of ade- pants in the seminar on which this volume is based de-quate telecommunications services is now central to bated the limits that should be imposed upon thisthe economic success of the prospects of both the emerging competitive environment and tried to iden-developed nations and the developing nations. The tify those services for which monopoly should still besuccesses or mistakes that are made in telecommunica- encouraged. In the end, it was acknowledged that thetions policy, structure, and organization will pro- questions could be answered only in the circumstancesfoundly affect the success or failure of national econo- of a specific country. A few issues were regarded as par-mies. This statement has particular relevance for the ticularly important, however. First, governments' abil-developing and newly industrialized countries of Asia. ity to interfere with the underlying reality has real lim-The competitive edge that is necessary for the countries its. Furthermore, most of the participants seemed toof the region to succeed in their export endeavors and agree that the extent to which competition is appropri-to achieve the integration of their national markets ate depends at least to some degree on the stage of sec-critically depends on the state of their telecommunica- tor development. In spite of this caveat, virtually alltions sector and on its ability to service the needs of governments acknowledge that competition in the pro-the broader economy. Malaysia's expanding exports, vision of value-added services and in terminal equip-China's success in integrating its national economy, ment is generally a good idea. There are, however, clearIndia's realization of its potential to export custom- limits as to how much competition is both realistic andmade software-all depend on the efficiency of the desirable. Unless and until there are major changes intelecommunications sector. The time when telecom- the costs of cellular technologies, for example, it ismunications managers and policymakers could take a doubtful that competition in local networks will be war-narrow approach and perspective is long gone. ranted in most cases. The costs associated with the du-

There is also an emerging consensus that competi- plication of hard-wired networks would be difficult to

.125

126 Richard D. Stem

justify, particularly in the resource-constrained envi- would find itself in this respect. It was agreed, however,ronment of the developing world. In a number of cases, that there was a need for major restructuring in mosthowever, the introduction of competition for long- countries and that a movement down the continuumdistance services could probably provide a healthy stim- was desirable. It was also noted that network maturityulus to sectoral efficiency. was not a precondition for sector reform, as is evident

The final outcome of this debate is not yet known. from the reforms currently under way in several devel-Successful examples of such competition exist-for ex- oping countries. Indeed, precisely because of the con-ample, Finland-but in reality the benefits of monopoly straints facing sector expansion, in developing coun-or quasi monopoly will effectively limit competition in tries the economic retums to sector reform and thesignificant areas of the sector for some time to come. resulting more efficient use of telecommunications as-This debate is particularly important for many develop- sets are likely to be even greater than in the developeding countries and for the newly industrialized coun- countries. Interestingly, the point was also made that,tries, which face additional sectoral limits on the although reform can start at any stage of network de-marketplace over and above those that exist in the velopment, it may well be easier when systems aredeveloped world. The overall macroeconomic resource small and simple.constraints facing these countries are such that, what- There was general agreement that three distinctever is done to change sector organization and de- areas with respect to sector restructuring deserve spe-velop new finance techniques, sector expansion will be cial attention: policy, regulation, and operation. Again,supply-constrained for some time to come. Dernand a few years ago no consensus existed. This consensuswill significantly exceed supply in a large number of cuts across different cultures and ideologies and acrossthese countries because the capital resources required economies at different stages of development. Thereto finance the necessary investments are just not there. will always be some blurring and fuzziness in the areaAs a result, the suppliers of telecommunications ser- where policy, regulation, and operation overlap; in thisvices will, for the foreseeable future, continue to be connection several participants highlighted the politi-in a powerful monopoly or quasi-monopoly position, cal impossibility of completely separating the threewhether or not the official policy is to promote compe- functions. In analyzing current practice and formal pol-tition. Realistically speaking, the degree of competition icy and organizational prescriptions, however, it is im-that can be achieved is thus limited, and there is a con- portant that as clear a distinction as possible be madesequent need for some sort of regulation. between the three activities.

In spite of such real limits on competition, seminar With respect to policy, government is obligated to ar-participants raised a number of particularly important ticulate objectives (and has the legitimate function ofpoints with respect to the threat of competition. Many doing so) for the sector as well as for the overall organi-noted the importance of a "cold draft," however weak, zational framework within which telecommunicationsin prompting enterprise efficiency. With respect to should operate. Within the overall and changing real-India, the interesting observation was also made that, ity, it must articulate the degree of competitive prac-although the new companies are geographically defined tices it wants in the sector. It must articulate the pri-monopolies, there is still a degree of competition in the orities between rural and urban areas and amongsense that the performance of one entity in one area particular categories of users. It must also indicate pre-is being compared with the performance of another in cisely the public revenue burden that it intends to placeits own region. Seminar participants also highlighted on the telecommunications sector. This latter point isthe competition created by the global market. In a glo- important since tax mechanisms in developing coun-bal economy, no country can be an island and define tries are sometimes not well developed. Income tax inits telecommunications objectives in a vacuum. If the a large number of developing countries is, in effect, vol-necessary telecommunications services are not pro- untary. The telecommunications sector does have thevided, industries can and will go elsewhere. Like it or ability to mobilize significant tax revenues. Many tele-not, the competitive environment is here. communications entities are capable of generating con-

Seminar participants spent some time debating the siderable surpluses, and users are willing to transferdefinition of privatization and the continuum of organi- some of their large surpluses to their governments inzational change from govemment department through exchange for adequate service. In contrast with thea statutory corporation to a joint stock company (pub- prevailing situation in many developing countrieslicly or privately owned). It was agreed that there were and newly industrialized countries, however, thesesuccessful examples of all types. It was also noted that resource-mobilization objectives must be clearly arti-political, cultural, and ideological considerations would culated. If they are precisely defined and the rules areprimarily determine where each particular country enforced equitably and predictably, the operating

Altematies for the Future 127

companies can establish and meet clear financial objec- in improving their management and operating systems.tives. If not, they will continue to encounter extreme Telecommunications policy, however, continues to befinancial difficulties. Public policy must also define the poorly defined. In many countries ministries and agen-terms of trade between the various operators. To what cies are not staffed to deal with these issues. They lackextent will interconnection be allowed? At what stan- the interdisciplinary expertise to analyze such difficultdards will interconnection take place? Will users and and complex matters. It is difficult to find any individu-operators in such sectors as railways, banking, oil ex- als or agencies who feel responsible for telecommunica-ploration, production and marketing, and telecommu- tions policy, and it is often far from apparent where thenications be encouraged to come together and create locus of responsibility for telecommunications policyjoint ventures in areas where significant scale econo- resides. A major effort to rectify this state of affairs ismies exist? Should an environment be created to en- necessary.courage them to trade capacity with each other? In all A sound regulatory framework is obviously essential.of these areas public policy has a crucial and legitimate Furthermore, it also seems evident that the regulatoryrole. Few govemments, however, have defined their burden and associated costs will increase with a move-role and obligations in this regard. Much more atten- ment toward competition and privatization. Regulationtion needs to be paid to these matters. in the developing countries and in the newly industrial-

Such issues have as much to do with economic policy ized countries is particularly important because, as Ias with telecommnunications policy. The role of the sec- noted earlier, despite growing competition, the macrotor in the mobilization of tax revenues is one example constraints mean that there will be a shortfall of tele-of its linkages to the broader economy; the potential for communications services for a long time to come. Astelecommunications to aid the development of capital a result, suppliers of telecommunications services haveand bond markets is another. Economic surveys in de- tremendous power that, if not properly regulated, willveloping countries and newly industrialized countries naturally be exploited. These overall supply constraintshave shown evidence of high rural and urban savings also imply that the traditional pressures for efficiencyrates. Those savings, however, are typically not mobi- emanating from the market will often be absent. Againlized, often because the institutions to tap the savings and in such an environment, appropriate regulatorysimply do not exist. The capital markets in a large num- structures to promote and initiate sector efficiency willber of developing countries are not well developed. This be required.state of affairs often results from such factors as inap- Several regulatory models in the developed countriespropriate interest rate regimes and the absence of capi- can provide useful lessons for the newly industrializedtal and stock markets and associated financial instru- countries and the developing countries. The regulatoryments. One of the major reasons for the weaknesses in challenge facing the developing countries, however, iscapital markets in many developing countries, how- rather unusual. Telecommunications operators, for ex-ever, is that independent and financially viable institu- ample, have the facts, control the information, andtions strong enough to command investor confidence know their systems and costs best. The regulator, how-are conspicuously absent. Telecommunications compa- ever bright and well trained, will always be at a disad-nies, suitably structured and operating in an appropri- vantage. This problem is particularly acute in the devel-ate and predictable overall policy environment, are oping countries, where well-trained and experiencedprime candidates to fill this gap. regulatory staff will be in short supply for the foresee-

ft is difficult to persuade govemments and politicians able future. Special regulatory mechanisms designed toto be explicit and to make clear decisions on many of address and anticipate these issues will be necessary.the issues noted above, particularly with respect to Some innovative aspects of the U.K. framework are in-such matters as defining the overall level of subsidies teresting in this respect. They have established a uniqueto particular users and the desired tradeoffs between formula that allows British Telecom relatively auto-rural and urban services. Good politics often involves matic tariff increases to adjust to inflation minus an ef-fudging such issues. Despite these realities, however, ficiency gain index. This formula does not, in principlethe telecommunications community must clearly at- aryway, require a large skilled and experienced staff totempt to force decisionmakers to be as clear as possible. monitor its implementation. Furthermore, it is clearly

Telecommunications policy is, in most countries, the defined, and the scope for arbitrary action is contained.most weakly developed and defined of the three critical The extent to which any regulatory framework canareas (policy, regulation, and operation). In recent achieve clarity and predictability, however, is obviouslyyears, significant progress has been made in improving limited. Government will always find it difficult to stayregulatory frameworks. Major gains have also been out of operating issues when it is the owner, and evenmade in restructuring telecommunications entities and independent regulatory bodies do and will listen to gov-

128 Richard D. Stem

emment policymakers. Realistically, the effectiveness vices for the country. Many widely differing offers wereof any regulatory system in meeting its objectives will received, and the Sri Lankan govemment had no basisthus depend as much on its ability to accommodate the on which to evaluate them. As a result, the whole re-informal relationships that exist between all the major structuring process was put on hold. The hiatus wasactors in the sector as on its formal structure. broken only when a properly staffed body endowed with

In light of the above, the operating entities thiem- adequate authority was appointed to think through theselves must have clear objectives and must be able to whole restructuring process. Since that time, progressoperate within a coherent framework. They must know has been sure and steady. False starts are thus danger-their corporate mission, but the policymakers will have ous; careful thought must precede action.to define much of this mission for them. The operators The lack of clarity with respect to both long-termwill have to manage cross-subsidies, and they will have policy direction and the allocation of responsibility forto provide services to targeted and disadvantaged users thinking through and implementing sector restructur-and to the rural areas where, despite possibly high so- ing does not seem to have slowed the pace of reformcial economic returns, the financial payoffs are unlikely or to have created confusion in a number of countries.to be attractive. The operators alone cannot make these There is a need for the telecommunications communitytradeoffs; the policymakers and the regulators will have to lobby hard to ensure that structure is introduced.to provide the necessary framework. The effort involved is of course difficult. It is not neces-

With respect to the structure of the major telecom- sarily in the short-term interest of operators to insistmunications entity, more and more countries are mov- on such clarity. They control the information, and in-ing along the continuum from a government depart- formation provides a valuable competitive edge. Theyment to a joint stock company. Although there is are major players; to the extent that their clients, theirperhaps disagreement about the ideal position at any owners, and their competitors do not quite know theone point in time, virtually all countries are moving rules, they obviously enjoy an advantage. This wouldalong this continuum. Many of the seminar partici- appear, however, to be a short-term and narrow per-pants emphasized that sector reform does not necessar- spective. In the long term, the service providers neededily imply privatization. Even joint stock companies do clarity to grow, to prosper, and to provide the necessarynot require private ownership. There would appear to quantity and quality of service. The current inadequa-be a need, however (whether the entities are publicly cies and shortcomings of the telecommunications sec-or privately owned), to distinguish clearly between the tor in the Philippines provide a good example of whatrole of ownership and that of management. Sri Lanka can happen when such clarity is absent for a longhas recognized the importance of this issue and as part period.of its current restructuring process intends to separate Another factor that needs to be highlighted is the na-the stock ownership function, the board of directors ture of the changes affecting the sector. The old daysfunction, and the day-to-day management function of of a cozy and stable technology, of the dominance ofits new telecommunications enterprise. Incidentally, in the engineering profession, and of a static organiza-a very different environment, the government of China tional structure have gone forever. We now confront ais currently pursuing enterprise reform and is consider- rapidly changing economic and technical environment.ing how to differentiate clearly between the role of own- The needed adjustments in policy and in regulatory andership, the establishment of broad strategic direction, operational structures should not be considered inperhaps through a board of directors, and the day-to- merely a static form. In a dynamic and rapidly changingday management of public enterprises. world, institutions and structures that can continually

Changes in corporate behavior will take time. Mov- respond to change are required. In other words, thereing from a structure dominated by a civil service men- is a vital need to institutionalize the policymaking pro-tality to one staffed by commercially oriented corporate cess so that it can both react to and anticipate change.managers is not easy. Some countries have attempted This issue is particularly important for many develop-to move quickly in making these changes, whereas oth- ing countries and newly industrialized countries be-ers are proceeding more slowly. In those latter in- cause shifting global comparative advantage requiresstances, it might have been preferable to push for them to be able to respond quickly to technologicalgreater dispatch. Still, the need for decisive action and economic changes. A dynamic telecommunica-should not obviate the need to think very carefully be- tions sector will be essential if they are to meet thoseforehand. The Sri Lankan experience is illuminating in challenges.this respect. Several years ago, the government decided In light of such considerations, what are the chal-to privatize. With little prior deliberation, foreign pro- lenges, and what should be the future agenda for theposals were invited to provide telecommunications ser-. telecommunications community with respect to these

Alteaties for the Futwv 129

issues? The highest priority appears to be the develop- by itself, but with joint ventures and other mecha-ment of a capacity to think through some of the above- nisms, progress may be possible.mentioned policy issues and to provide a coherent envi- In this period of rapid change and organizational ev-ronment for the sector. The World Bank will have to olution, there is clearly a need to exchange views andpay more attention to these matters than it has in the experiences much more frequently. Often many of thepast. The Bank has a comparative advantage in inte- relevant experiments that have taken place in onegrating some of these sector policy issues with those country are not known to other nations contemplatingof the broader macroeconomy. The more experienced similar steps. Appropriate mechanisms for such ex-operating companies and consultant companies appear changes need to be established. Much of the exchangeto be better equipped to deal with the issues of entity is best kept informal. Telecommunications policymak-management. There is also a need to develop a global ers and managers clearly need to visit each others'consulting capacity to advise countries on their overall countries more frequently. In this connection, thepolicy and regulatory regimes. This is not an easy task, World Bank is ready to use its good offices to facilitatebecause specialized economic, legal, financial, banking, such exchanges. The Intemational Telecommunica-and regulatory skills, in addition to operating expertise, tions Union, the Commonwealth Telecommunicationsare required. Personnel with the necessary training and Organisation, and the Center for Telecommunicationsexperience in these areas are difficult to find and re- Development have already done so and are ready tocruit. It may not be easy for any one telecommunica- continue.tions company to succeed in building such a capacity

Glossary

This glossary is not meant to be a definitive lexicon, but vices) or state (intrastate services) a subscriber is lo-rather an aid to the reader in understanding the terms cated.found in this volume. Terms in the definitions in bold- Balanced loading requirement A previous 'cc re-face are defined elsewhere in the glossary. quirement, intended to ensure support for satellite

Access charge Term used in the United States for services, that international record carriers and AT&Tuse intemational cable and satellite facilities equallythe fee Imposed by local exchange carniers (LECS) on in the North Atlantic region.

interexchange carriers and on end users to defray thatportion of the costs of the LEC's facilities that are as- Bandwidth The range of frequencies that can besociated with or otherwise assigned to the provision transmitted over a particular communications chan-of interexchange services. nel, which also determines the maximum bits per sec-

Asian Development Bank The regional development ond that the channel will accommodate without ex-bank established in 1966 on the recommendations of cessive distortion.the United Nations Economic Commission for Asia Basic service A regulatory term in the United States,and the Far East to foster economic growth and coop- subsequently adopted by the Canadian Radiotelevisioneration in Asia and to contribute to the acceleration and Telecommunications Commission, for a carrierof economic development in the developing countries offering of a "pure transmission capability over a com-of the region. munications path that is virtually transparent in

terms of its interaction with customer supplied infor-AT&T American Telephone & Telegraph Company, the mto.largest U.S. provider of domestic and international mation.long-distance communications services. Bearer Service A type of telecommunications service

Audio conferencing Two-way voice communication that provides the capability for the transmission of sig-between two or more groups or three or more individ- nals between user-network interfaces.uals, who are distant from one another and are using Bit rate The aggregate rate in a digital transmissiona telecommunications medium. path expressed in bits per second.

ALSSAT AUSSAT Pty. Ltd., the operating company Boc Bell operating company, a local exchange car-of the Australian national satellite system. rier that was part of the Bell system before the

Averaged pricing The regulatory practice of making breakup of AT&T. There are seven regional Bell oper-rates for a regulated service or service component uni- ating companies (RBOCs), each of which has one orforn throughout a nation or a state based on average more BOC subsidiaries.nationwide or statewide figures for costs and usage. In British Telecom (BT) British Telecommunicationsan averaged rate structure, the rate charged by a spe- Public Limited Company (plc), the major provider ofcific vendor for a service or service component will be domestic and intemational telecommunications ser-uniform no matter where in the nation (interstate ser- vices in the United Kingdom; British Telecom oper-

130

Glossary 131

ates the fourth largest telecommunications system in to the provision of those services available to unaffili-the world. ated entities offering similar enhanced services. Such

BTI British Telecom Intemational, the division of network capabilities must be supplied on an economi-British Telecom responsible for operating its interna- cally and technically "comparably efficient" basis. cEitional telecommunications network and other inter- is intended to be a temporary arrangement, pendingnational business such as consulting and joint ven- implementation by the BOCs of open network archi-tures. tecture (ONA).

Bundespost, Deutsche The public administration in Cellular radio A service having low-power radio trans-the Federal Republic of Germany responsible for pos- mitters arranged in a honeycomb pattem to permittal, telecommunications, and postal banking services. reuse of a frequency many times in a given area,The Deutsche Bundespost is not headed by a manag- mainly for mobile use but also in fixed applications.ing body (such as a board of directors) but by a parlia- Central office A telecommunications exchange ormentary state secretary with civil servant status who switching facility.reports directly to the Federal Minister of Posts and CNCP Canadian National/Canadian Pacific Telecom-Telecommunications. munications, a common carrier which provides a

Bypass A term used to describe arrangements or facil- comprehensive range of countrywide telecommunica-ities that do not use local exchange carrier (LEC) tions services except public switched voice.switched access services and hence avoid payment of Code conversion The conversion from one represen-switched access charges. tation of coded information to another representation

c&w Cable and Wireless plc, a British-based world- of the same information in another code. An examplewide group that provides and operates the public tele- is the conversion of character signals or groups ofcommunications services of many countries and terri- character signals in one telegraph code into corre-tories under franchise of prescribed duration granted sponding signals or groups of signals in anotherto it by the government concerned. It has its head- code.quarters in London. Commission of the European Communities (European

Carrier Any individual, partnership, association, joint Commission) The administrative organ of the Euro-stock company, trust, or corporation engaged in pro- pean Communities (see EEC). The Commission hasviding telecommunications facilities or services for seventeen members, who are appointed by their gov-hire. ernments for four years.

Cartel A group of firms that enter into an agreement Common carrier A carrier that provides telecommu-to set mutually acceptable prices for their products, nication services to the public at large and is generallyoften accompanied by output and investment quotas. subject to nondiscrimination requirements.The rules of the cartel may be embodied in a formal Common carriage Regulatory status describing anydocument, which may be legally enforceable, and pen- service held out to all potential customers indiffer-alties will be laid down for firms which violate it. The ently.essence of a cartel is that it is a formal system of collu- Company law A body of law covering the formation,sion, as opposed to a set of informal or tacit agree- registration, and operation of companies and settingments to follow certain pricing policies. Cartels are out legal requirements. Normally all privately ownedcurrently illegal in the United Kingdom, the United businesses in a country are incorporated under suchStates, and other countries. a law.

ccrrr Comite Consultatif Intemational Telegraph- Conmuter i decision of the Fcc An Fcc proceedingique et Telephonique (International Telegraph and that distinguished between basic and enhanced ser-Telephone Consultative Committee), a permanent vices and determined that enhanced services shouldorgan of the lnternational Telecommunication Union not be regulated. The FCC also determined that cus-(rrU). The ccrrr is responsible for the development of tomer premises equipment should be deregulated.voluntary international standards for telecommunica- Computer II permitted AT&T to offer enhanced ser-tions. vices and customer premises equipment through a

CEI Comparably efficient interconnection, the regu- subsidiary separate from AT&T's communications ser-latory concept of the FCC's Computer III decision that vices.requires that when a Bell operating company (Boc) Conputer III decision of the FCC An Fcc proceedingseeks to provide enhanced services on an unseparated that permits the Bell operating companies (BOC) tobasis it must make the network capabilities necessary offer enhanced and basic services on an unseparated

132 Glossar"

basis provided that comparably efficient interconnec- Chilean telephone company (now privately owned).tion (CEI) procedures are followed pending Fcc appro- CTNE CompahiiaTelef6nicaNacionaldeEspafia,Spain'sval of Bell operating companies' open network ar- national (privately owned) telephone company.chitecture (ONA) plans. cro Commonwealth Telecommunication Organi-

COMTELCA Regional technical cooperation organiza- zation, an intergovemmental collaborative organiza-tion of the five Central America telecommunications tion of twenty-eight Commonwealth countries, whichenterprises (Costa Rica, El Salvador, Guatemala, Hon- promotes the efficient exploitation and developmentduras, and Nicaragua). of the Commonwealth's extemal telecommunications

Concentrator A switching system that connects a system through consultation and collaboration on allnumber of inlets to a smaller number of transmission aspects of Commonwealth international telecommu-circuits, thereby allowing a few transmission channels nications policies and practices.to carry traffic from many sources. A wide variety of Data processing services Term which refers to pro-concentrators is used in telecommunications, includ- cessing functions such as (a) general purpose pro-ing voice concentrators, which take advantage cf the gramming and program execution, usually under usersilent periods in telephone conversations to increase control; (b) special purpose numerical data processingthe capacity of submarine cable or satellite systems, for accounting and other business applications; (c)and data concentrators, which permit a common word processing; (d) proprietary information retrievalhigh-speed channel to handle traffic from several low- services; (e) automatic type setting; (f) systems designspeed terminals. In telephone switching, however, the and programming; and (g) programming turnkey orterm usually refers to a line concentrator or to a line integrated systems, which combine all of the above.or trunk module that can be remotely located from its DDD Direct distance dialing. See STD.

host. DDI Daini Denden Inc., new Type I entrant in theConsumer's surplus The difference between the total Japanese domestic telecommunications market.benefit an individual derives from consuming a particu- Debt financing The long-term borrowing of money bylar quantity of a good or service (usually expressed in a business, usually in exchange for debt securities orterms of the amount he is prepared to pay for it) and a note, to obtain working capital or other funds neces-he amount he actually pays to the supplier of that sary for investment or operations or to retire other in-good or service. debtedness.

Cost-based pricing The general principle of charging Deregulation Removal of a regulation or regulationsfor services in relation to the cost of providing these goveming a telecommunications service or provider.services. The deregulated service or provider is principally sub-

Cream skimming Refers to the concem of traditional ject to the dictates of the marketplace; it no longer hascarriers, policymakers, or regulators that competitors any guarantee that costs will be recovered or anywithout social obligations may choose to compete in profit eamed. Costs of a deregulated service cannot beonly the lucrative market (where tariffs have generally covered by profits from regulated operations. Profitsbeen kept well above cost) and will thereby reduce the from a deregulated service are usually not included inincome which the traditional carrier would normally the calculations when figuring the appropriate profithave used to meet its social obligations, such as pro- margin to be allowed on a firm's regulated opera-viding services in remote high-cost areas. tions.

Cross-bar exchange A common-control electrome- Developed countries Refers to the industrialized na-chanical analog switching system. tions, particularly all members of the Organisation for

Cross-subsidization The practice of using surplus riev- Economic Co-operation and Development (OECD).enues generated from one product or service to sup- Developing countries A broad range of countries thatport another; typically refers to subsidization of com- generally lack a high degree of industrialization, infra-petitive services with revenues from monopoly structure, and other capital investment or advancedservices. living standards among their populations as a whole.

CPE Customer premises equipment, a generic term The poorest of such countries are referred as the leastused in reference to telephone handsets, key tele- developed countries.phone systems, private branch exchanges, and other DGT DirectionGeneraledesTel1communications(nowterminal equipment necessary for the transmission France Telecom). The exclusive provider of public tele-and reception of telecommunications. communications services in France.

crc Compafifa de Telifonos de Chile, the largest Digital exchange (digital switch) An electronic switch-

Glossary 133

ing system using logic circuits that handle digital ings resulting from several outputs being produced bysignals without converting them into analog form. a single entity rather than by separate entities.

Digital transmission systems A transmission system Economies of specialization Term used to indicatein which information is transmitted in a series of cost savings resulting from certain goods or servicespulses and in which the signals can be regenerated. being produced separately by several entites rather

Divestiture The breakup of AT&T, mandated by a fed- than by a single entity.eral court on the basis of a Consent Decree between EEC European Economic Community, or EuropeanAT&T and the U.S. Department of Justice that settled Communities, an association of western Europeanthe antitrust suit against AT&T. Effective January 1, countries established by the Treaty of Rome in 19571984, AT&T-owned Bell operating companies (BOCs) to facilitate the removal of trade barriers and promotewere separated from AT&T into seven independent re- the free movement of goods, labor services, and capi-gional Bell operating or holding companies tal between member nations. The EEC has grown from(RBOCs), and given sole permission to use the Bell its six original members (Belgium, France, Italy, Lux-name and logo. embourg, The Netherlands, and the Federal Republic

Division of revenues The allocation of the revenues of Germany) to twelve nations (now including Den-from jointly used facilities among various kinds of mark, Greece, Ireland, Portugal, Spain, and thetraffic (such as toll and local) and among the entities United Kingdom).serving that traffic. Electronic banking See Telebanking.

Dominant carrier A regulatory classification for the Electronic funds transfer (EFT) The process throughtelecommunications provider that has the predomi- which the banking industry utilizes computer andnant market share or is otherwise able to exercise communications technology to move funds from onemarket power. banking location and/or account to another.

DP Distribution point, connecting point between Electronic mail A system for entering a documentsubscriber lines and a cable. and transmitting it by electronic means either to its

Drop wire One or more pairs of insulated wires used ultimate destination or to a point near the destinationto run a subscriber's line from the distribution termi- for delivery by post, courier, or some other means.nal at a pole to the protector on the subscriber's prem- Electronic messaging The creation, transfer, storage,ises. and retrieval of text, graphics, images, voice, or mes-

Duopoly The market situation in which there are only sages of any nature entirely by electronic means.two sellers of a particular good or service. Messaging implies retrieval at the recipient's discre-

Economic cost The monetary amount that would be tion, and facilities are generally provided for filing, re-derived from the employment of a factor of production directing, and replying to messages received.in the best altemative use. Enhanced services See Value-added (enhanced) ser-

Economic rate of return The discount rate that makes vices.equal to zero the present value of project benefits, net ENTEL Empresa Nacional de Telecommunicaciones,of costs, when all costs and benefits are valued to re- the name used in various Latin American countries forflect true scarcities in the economy. Economic rate a state telecommunications enterprise.of return differs from internal rate of return in that ENFIA Exchange Network Facilities for Interex-costs are corrected to remove pure transfer payments change Access was, before adoption by the FCC of ac-(such as import duties) and major price distortions (of cess charge, a controversial arrangement betweencapital, foreign exchange, or unskilled labor, for ex- occs (other common carriers) and AT&T'S local mo-ample), and benefits are corrected to include pay- nopoly.ments excluded from the revenue stream, and some- Equal access A requirement of the Modified Finaltimes also to include conservative estimates of Judgment (MFJ) in the AT&T case that the divestedconsumer's surplus. Used as test against investments Bell operating companies offer switched access andthat are wasteful of scarce national (as opposed to other interconnections to all interexchange carriers ofcompany) resources. a type equivalent to that furnished to AT&T.

Economies of scale Term used to indicate the situa- ESS toll switch Electronic switching system tolltion when output increases to a greater extent than switch, an automatic -switching system in which theinputs; that is, when the unit cost of production de- control elements are mostly electronic semiconductorcreases as the total volume of output increases. devices. Although this class of system includes hard-

Economies of scope Term used to indicate cost sav- wired programmable exchanges and wired-logic ex-

134 Glossary

changes into which some electronic components have vices and Equipment, Towards a Dynamic Europeanbeen integrated, most ESS exchanges are stored- Economy," prepared in June 1987 by the Commissionprogram systems. of the European Communities. The Green Paper ana-

Externality Any benefit from or costs of an action that lyzes the trends in telecommunications policy in theaccrues to persons (or firms) other than those directly EEC and proposes for discussion and action an EEC-involved in the action. wide telecommunications policy.

Facilities, network All equipment, sites, lines, cir- Gross revenue The total amount of sales revenue, be-cuits, and software that are used to provide telecom- fore deductions for returns and allowances but aftermunications services. deductions for trade discounts, sales taxes, excise

Facsimile The communications process in which taxes based on sales, and cash discounts.graphics or text documents are scanned, transmitted IBM International Business Machines Corporation,via a (typically dial-up) telephone line, and reproduced leading manufacturer of computers and data equip-on paper by a receiver. Facsimile device operation typ- ment.ically follows one of the ccIrrT standards for informa- IDc Intemational Digital Communications, one oftion representation and transmission (Group 1 analog, two new Japanese Type I intemational telecommuni-with page transmission in four or six minutes; Group cations carriers; it competes with KDD and ITJ and is2, with page transmission in two or three minutes; owned by Japanese and foreign private interests.Group 3 digital, with page transmission in less than INMARSAT Intemational Maritime Satellite Organi-one minute; and Group 4 digital, defined for operation zation, a commercial nonprofit cooperative of fifty-in conjunction with teletex). five member states that leases, owns, and operates a

Fcc Federal Communications Commission, the global telecommunications satellite system that pro-U.S. telecommunications regulator at the federal (na- vides maritime, aeronautical, and land mobile satellitetional) level. services.

Fiber-optic cable (optical fiber cable) A communica- lNTELSAT Intemational Telecommunications Satel-tion cable containing one or more low-loss, highly lite Organization, a commercial nonprofit coopera-transparent silica, glass, or plastic fibers used to trans- tive of 115 countries that owns and operates the globalmit information in the form of light (that is, signals communications satellite system used by countriesin the visible or nearly visible region of the frequency around the world for intemational communicationsspectrum). and by more than 25 countries for domestic commu-

FNTEL Fiji International Telecommunications Ltd., nications.a company owned jointly by the Fiji government (51 Interconnection charge In the United States, carrierspercent) and Cable and Wireless plc (49 percent) and charge enhanced service providers a basic intercon-solely responsible for international telecommnunica- nection charge to recover the costs of the intercon-tions in Fiji. nection facilities (including the hardware and software

Flat-rate basis Method of pricing local service by for routing, signaling, and other basic service func-which customers pay a regular charge each month for tions) needed to provide enhanced services using basican unlimited number of calls. network functions.

Franchise (utility) Authorization given to a company Interexchange Relating to services and channels be-by a regulatory agency to provide a public utility ser- tween or among two or more exchanges, rate centers,vice. It usually specifies the geographic area of senrice or local access and transport areas (LATA) or to carri-and other obligations and privileges. ers providing such services and channels.

Frequency management The monitoring of the occu- Interexchange carrier A carrier authorized by thepancy of the radio spectrum and the assignment of fre- Federal Communications Commission (FCC) or aquencies to radio services so as to enable the maxi- state public utility commission to provide long-mum number of services to operate with the distance telecommunications services between localminimum interference. Sometimes referred to as access and transport areas (LATAS).spectrum management. Interexchange rates Rates charged for measured and

GNP Gross national product, the total value of all flat-rate interexchange services based on the distancefinal goods and services produced in an economy with- between rate centers.out allowance for capital depreciation. Internal rate of return The discount rate that makes

Green Paper "The Green Paper on the Development equal to zero the present value of benefits resultingof the Common Market for Telecommunications Ser- from a project, net of the costs incurred to produce

Clossy 135

these benefits. Cost and benefit streams are usually supplies are shipped to arrive exactly when they arederived from financial statements (actual and forecast needed.payments and receipts) expressed in constant-value KDD Kokusai Denshin Denwa Co. Ltd., Japan'scurrency (that is, net of projected inflation). only international telecommunications carrier until

Intra-LATA Relating to telecommunications services 1985. KDD now faces competition from two other Typethat originate and terminate in the same local access I intemational carriers: ITJ and IDc.and transport areas (LATA), jurisdictions within Key system A business communication system whichwhich Bell operating companies (BOC) may provide provides common access to a number of central officetelephone service. trunks from multibutton telephone sets, and allowsNTUoC International Telecommunications Users communication between sets over private intercomGroup, an organization formed in Brussels in 1974 to lines, by pressing a key associated with that trunk orpromote the interests of telecommunications users in- line.temationally. LAN Local area network, a privately owned digital

IRU Indefeasible right of use, an arrangement be- communications system that provides a high-speedtween an owner of physical intemational communica- link among a variety of devices (generally computertions circuits and a buyer, under which the buyer pur- terminals, microcomputers, or minicomputers) on achases an absolute right of access to intemational single shared medium, usually over a distance of upcircuits. to two kilometers on the user's premises.

ISDN Integrated services digital network, an all- LATA Local area and transport access, one of thedigital network handling a multiplicity of services 161 local telephone serving areas in the United States,with standard interfaces for user access. established as a result of the Bell divestiture.rri Intemational Telecom Japan Inc, a new Type I in- Law of large numbers The tendency for particularitiesternational carrier in Japan that competes with KDD of individual members of a group to cancel out as theand IDc and is owned by private interests. size of the group increases.

rrU Intemational Telecommunication Union, the spe- Lea The conveyance of the right to use an asset bycialized agency of the United Nations responsible for one person (the lessor) to another (the lessee) for aintemational telecommunication matters. Founded specified period of time in return for rent.in 1865, it is the oldest intemational, intergovem- Leased line A communications facility that is pro-mental organization. At the end of 1988 it had 166 vided exclusively to the user for a flat monthlymembers. Its functions include the regulation and charge.planning of international telecommunications, the es-tablishment of equipment and systems operating Least developed countries Some thirty-six of thestandards, the coordination and dissemination of in- world's poorest countries as defined by the United Na-formation required for the planning and operation of tions.telecommunications services, and the promotion of LEC Local exchange carrier, a term used in thethe contribution to the development of telecommuni- United States to describe carriers providing local ser-cations and related infrastructure. The rru Convention vice and including Bell operating companies (Bocs)is the basic treaty instrument and addresses, among after divestiture.other things, the composition, purposes, and struc- Une of credit An agreement by a creditor, lender, orture of the ITU. The Plenipotentiary Conference is the bank to extend credit or to make a loan up to a maxi-fundamental organic meeting of the nru. mum specified amount, when needed by a customer.

IVAN Intemational value-added network, value- Long-distance Characteristic of any telecommunica-added services (VANS) provided on an international tions transmission service, particularly telephonebasis. service, that connects locations which cannot be

JTM Jabatan Telekom Malaysia, Malaysia's telecom- reached with a local telephone call-that is, which liemunications department responsible for policy and outside of each other's local exchange area. The loca-regulatory functions. Before 1987 it was also responsi- tions may be within the same state (intrastate) or inble for operating Malaysia's telecommunications net- different states (interstate).work. Long-distance network Network involved in trans-

Just-in-titne manufacturing A manufacturing tech- porting information from one geographic location tonique that depends heavily on very accurate and another. Often called the toll network in North Amer-timely communication with suppliers to ensure that ica and the trunk network in Great Britain.

136 GCssazy

Loop A pair of wires, or its equivalent, between a cus- for telephone communication between exchanges ortomer's station and the central office from which the other rate centers.station is served. Multiplexer A device that combines two or more

Mailbox service See Electronic messaging. signals for transmission over a shared path by allocat-Marginal cost The increment in total production ing to each a distinctive frequency range or time slotcosts needed to produce one additional unit of out- in a common spectrum or bit stream.put. Nic Newly industrialized country (such as Republic

MCI U.S. interexchange carrier, with the largest share of Korea and Singapore); sometimes also referred toof other common carrier (occ) traffic. MCI provides as newly industrialized economy (NIE).long-distance, private line, cellular, paging, intema- Non-tariff-based circuits Telecommunications trans-tional, and electronic mail services. mission capacity that is obtained by negotiation be-

Mercury Mercury Communications Limited, the tween the carrier (such as KDD) and the operator ofUnited Kingdom's second network operator, a subsidi- an IvAN; used to distinguish the terms and conditionsary of Cable and Wireless plc. of such circuits from tariff-based (usually leased line)

Messaging See Electronic messaging. circuits.MF1 Modified Final Judgment, the judicial decree Non-traffic-sensitive costs Investment and operatingthat ended the U.S. Department of Justice's antitrust costs (including depreciation and return on invest-suit against AT&T in 1982. ment) associated with telephone company facilities,

which do not vary with the aggregate level of usageMicrowave link A radio transmission system opera- (number of calls, minutes of use) of the telephone sys-ting in the range above 1 gigahertz (GHz) capable of tem. The principal component is the subscriber linecarrying large numbers of telecommunication circuits connecting each customer's home or business prem-using beams relayed by means of highly directive an- ises with the local telephone company's central of-tennas. fice.

Microwave radio Radio transmission system using .Nfrequencies above 1 gigahertz (GHz) that can be eco- regulatory body to be established in Sri Lanka.nomically transmitted using highly efficient small an-tennas on relatively inexpensive towers. YfN Nippon Telegraph and Telephone Corpora-mte Minnstorelay ofIntexationai Towders.dIndustry tion, formerly Japan's only domestic carrier. NTr was

M(p Ministry of Inteational Trade and Industry privatized in 1985 and now competes as a Type I do-'Japan). mestic carrier.

Mobile services Radiocommunication services be- occ Oter common carriers, a term used in thetween ships, aircraft, road vehicles, or other stations United States to refer to interexchange carriers otherfor use while in motion or between such stations and than AT&T. It includes specialized common carriersfixed points on land. (sccs), domestic and intemational record carriers

Monopoly A market structure with only one firm sell- (ORCs), and domestic satellite carriers.ing a given good or service and no other firms selling OECD Organisation for Economic Co-Operation andclosely related goods or services. If, as is often the case Development, a forum for the industrial countries.with public utilities, the technology is such that the Its aims are (a) to encourage economic growth and -

existence of more than one supplier would lead to high employment with financial stability among -much higher production costs, the structure is re- member countries, and (b) to contribute to the eco- -ferred to as a natural monopoly. nomic development of the less advanced member and -

MPSC Michigan Public Service Commission, the nonmember countries and the expansion of world -

regulatory agency of the state of Michigan in the multilateral trade. The OECD has provided an impor- -

United States. tant forum for the discussion of intemational mone- -

pTr Ministry of Posts and Telecommunications in tary problems and for promoting aid to developing -various countries. countries.

MTNL Mahanagar Telephone Nigam Limited, a OFTEL Office of Telecommunications, the indepen-wholly owned corporation of the govemment of India dent regulatory body set up to supervise the imple-which operates the telecommunications services in mentation of telecommunications policies, competi-Bombay and Delhi. tion, and licenses in the United Kingdom.

Km Message toll service, the basic service fumished oNA Open network architecture, a telecommunica-

Gloswy 137

tions network configuration and regulatory scheme switching system owned or leased by an organizationadopted by the FCC. Upon approval of the Bell opera- and generally installed on its premises, which providesting companies' oNA plans by the FCC, the BOCs may lines for intemal communication between local exten-provide both basic and enhanced services on condition sions and provides a smaller number of trunks thatthat they offer certain basic network functions on an give access through the local switch to the public net-unbundled, equivalent basis to all affiliated and unaf- work.filiated enhanced service providers. Cross-subsid- Pco Public call office, a telephone station availableization between monopoly (basic) and enhanced ser- for the use of the public, generally on payment of avices is prohibited, and accounting and reporting fee to an attendant or a coin box.schemes are to be implemented. Pentaconta switch The registered name of a particu-

ONA Forum One of two open network architecture fo- lar crossbar exchange.rums organized by the regional Bell operating com- plc Public limited company.panies (RBOCS), in October 1986 and March 1987, to Predatory pricing The setting of prices so low thatdevelop some common features for their ONA plans competitors will be driven out of business.and to provide an opportunity for enhanced service Price cap regulation A method of regulating Britishproviders and users to contribute their views on what Telecom's prices whereby a "cap" is placed by OFTEL

the characteristics of the plans should be. Other par- on the prices of a basket of services, with annual in-ticipants included interexchange carriers, equipment creases tied to an inflation factor. The FCC has pro-vendors, consultants, research organizations, and posed price cap regulation of AT&T and the BOCs, toother (non-Boc) local exchange carriers (LECs). replace rate-of-return regulation.

Online database services The provision of electronic- Private line service A permanent connection betweenally published machine-readable information that can two customer premises, generally not involving cen-be accessed directly by the researcher over a telecom- tral office switching operations.munications network. Private network Any network used to communicate

oNP Open network provision, the European Com- within an organization (as distinct from providing ser-mission's proposal for standardization of transport vice to the public), based on a configuration of leasedservice offerings, network interfaces, and access ar- or own facilities.rangements among the EEC'S member states. Basic Privatization Transfer of a utility organization (suchprinciples include nondiscriminatory access to net- as a telecommunications administration) from gov-works, transparent network configuration, and the emient ownership to public shareholding ownership;prohibition of cross-subsidization. transfer of financial responsibility from the public sec-osi Open system interconnection, a seven-layer tor to the private sector.model proposed by the Intemational Organization for Product differentiation The creation of differences inStandardization (iso) to provide a framework for de- essentially the same type of product by means ofveloping protocols that will enable communication . . avrsn ..between dissimilar types of computer devices from dif- bradign, agn a t rts lferent vendors. or design, and so on.

Protocol conversion A service that permits communi-OTC(A) Overseas Telecommunications Commission cation between customer premises equipment (CPE)(Australia), the Australian international telecommu- catin with differ premises exame, be-nications carrier, a govemnment (that is, state-owned) operating with different protocols, for example, be-enterprise, tween a personal computer (which usually operates on

an asynchronous protocol) and a host computer oper-PABx Private automatic branch exchange, a private ating on the ccirr X.25 protocol.branch exchange (PBX) which makes possible some or Protocol Refers to the highly formalized ground rulesall connections from extensions without the services that permit two interconnected data terminals to initi-of an attendant. ate the communication process, effect information

Packet switching A data communications service in transfer, and terminate the communication process.which a data stream is divided into units called "pack- If the built-in protocols of the two terminals differ,ets" (typically composed of approximately 200 charac- communication between the two cannot take place di-ters) that are separately routed to a destination where rectly.the original message is reconstituted. PSTN Public switched telephone network, a country's

PBX Private branch exchange, a manually operated telephone system, including land lines, exchanges,

138 Glossamy

trunks, central offices, switching centers, and, in Rate-of-return regulation A synonym of Rate basesome countries, the telephones. regulation.

nc Pacific Telecommunications Council, a regional Rate rebalancing The gradual adjustment of priceorganization which draws its membership from gov- structures-as between local exchange and long-emiment, academia, carriers, and users for the pur- distance services, for example-to reduce cross-sub-pose of promoting telecommunications development sidization and to align prices more closely with costs.in the Pacific region. RBoc (RHc) Regional Bell operating company (re-

PTo Public telecommunications operator, in the gional holding company), one of the seven holdingUnited Kingdom any company or entity offering a companies created by the 1982 divestiture decree thatpublic telecommunications service. settled the U.S. Department of Justice antitrust case

PrI Post, Telegraph, and Telephone, usually the against AT&T (MFJ). The seven RBOC's and their re-name given to the government department or state spective operating company subsidiaries are: NYNEXentity that provides postal and telecommunications Corporation (New York Telephone Company and Newservices. England Telephone Company); Bell Atlantic Corpora-

Public utility commission An agency charged with tion (New Jersey Bell, Bell of Pennsylvania, Diamondregulating telecommunications and other public util- State Telephone, and the Chesapeake and Potomacity services, usually within a state of the United States. Telephone Companies of Maryland, Virginia, West Vir-Sometimes called a public service commission. ginia, and the District of Columbia); BellSouth Corpo-

ration (Southern Bell and South Central Bell); AmTeri-Radio frequency management See Frequency man- tech Corporation (Michigan Bell, Ohio Bell, Indianaagement. Bell, Illinois Bell, and Wisconsin Telephone Com-

Radio frequency spectrum See Radio spectrum. pany); Southwestern Bell Corporation (SouthwestemRadio paging A service that provides selective calling Bell Telephone Company); US West (Northwestemfrom any telephone through a base station to one or Bell, Mountain Bell, and Pacific Northwest Bell); anda predetermined group of radio receivers, which emit Pacific Telesis Group (Pacific Bell and Nevada Bell).an audible, visual, or tactile alert and sometimes then Two other former Bell system operating companies-record a numeric, alphanumeric, or even a short ver- Southern New England Telephone and Cincinnatibal message. Bell, Inc.-were not majority owned by AT&T and are

Radio spectrum The portion of the electromagnetic not considered Bocs for purposes of the various re-spectrum within which frequencies can be generated strictions and limitations imposed by the antitrust set-and detected by electronic means. tlement.

Radio telephone Any service for transmitting speech Recommendations of the ccTTr A collection of recom-using radio waves but used specifically to denote a mo- mended technical and administrative practices relat-bile telephone service providing two-way full-duplex ing to intemational telecommunications publishedvoice communication with interconnection, generally every four years by the International Telephone andautomatic, to the public switched telephone netwrork Telegraph Consultative Committee (ccITT) and gen-(PSTN) erally having the effect of voluntary intemational tele-

Rate and tariff regulation Regulation of a carrier's communication standards.prices, often requiring that they be published and be Regulation The process ensuring that public utilitiesnondiscriminatory. Price cap and rate base regulation such as common carriers operate in accordance withare two approaches to rate and tariff regulation. legal rules. Also the body of rules in a tariff governing

the offering of service by a carrier and including prac-Rate base regulation Regulation of prices that corn- . . .mon carriers charge, based on fixing a rate of retunm tices, classifications, and definitions.on the carrier's investment or rate base. Regulator An agency empowered to control and mon-

itor the commercial activities of radio and televisionRate de-averageng Tr e regulatory practice of settmig broadcasters, cable system operators, telecommunica-differing rates for a regulated service or service com- t.n cares or an ote ulcuiitntepbiponent in response to differences in costs and usage tions carers, or sty otheT public utility m the publicfrom one route to another, one city to another, or one interest.state to another. In a dc-averaged rate structure, the Re-regulation Reimposition of regulations over therate a subscriber pays for a particular service from a provision of telecommunications services or facilities.specific vendor will vary according to the subscriber's Often viewed as a reaction to deregulation.geographic location. Remote access data processing A service that allows

Glossary 139

customer premises equipment (CPE) to interact with State enterprise A commercial or industrial undertak-a distant computer via common carrier communica- ing owned and operated by the state.tions links, usually over the public switched network Statute Binding rule enacted by the sovereign author-(PSTN). ity in a society and laying down the fundamental prin-

Resale The subsequent sale or lease on a commercial ciples for relations between the members of that soci-basis, with or without adding value, of telecommuni- ety.cations services leased from a telecommunications STD Subscriber trunk dialing or direct distance dial-carrier. ing (DDD), a telephone exchange service that enables

Restructuring A change in the structure of rate com- the telephone user to call other subscribers outsideponents for an existing service. Also refers more gen- his local area without operator assistance.erally to major changes in sectoral organization and STM Syarikat Telekom Malaysia Berhad, the whollyin the ownership of operating entities. owned government enterprise incorporated in accord-

RPI Retail price index, a measure of general price ance with the Companies Act of Malaysia, responsiblelevel used, for example, in the U.K. formula for price for operating the telecommunications business in Ma-cap regulation. laysia according to the Telecommunications Services

RPOA Recognized private operating agency, a pri- Act of 1985.vate or government-controlled corporation (such as Strowger switch An electromechanical switch basedAT&T) that provides telecommunication services in ad- on a stepping relay patented by Strowger in 1891.herence to international telecommunication conven- Subscriber loop A link between equipment in a sub-tions. Recognized RPOAS participate as nonvoting scriber's premises and the telecommunication centermembers of the ccirr. providing the required services.

Rural Electrification Administration Agency in the swFw'r Society for Worldwide Interbank FinancialU.S. Department of Agriculture which finances the Telecommunications, which operates a computerizedconstruction of rural electric and telephone facilities. telecommunications network to provide automatedEstablished by Congress in 1935 and authorized in international message processing and transmission1949 to make loans for extending telephone service services between financial institutions. Owned by theinto rural areas. international banking community and operational

Separate subsidiary requirement The requirement since 1977, it connected in early 1989 more thanunder the Computer !! decision of the Fcc that all pro- 2,900 destinations in 60 countries. The network isviders of basic services could offer equipment and controlled from two operating centers in the Unitedservice enhancements only through a fully separate States and the Netherlands. The society's headquar-subsidiary. ters are in Belgium.

Services In telecommunications, the sum of all acts Switching node An installation located at a pointand facilities necessary to exchange information. where several data transmission links converge. ItBearer service and teleservice are types of telecommu- serves to direct traffic from one link to another.nication services. System X A medium-capacity digital switching sys-

SITA Societe Internationale de Telecommunications tem developed jointly by British Telecom, GEC Tele-Aeronautiques (Airline Telecommunications and In- communications, and Plessey for use in the publicformation Services), a nonprofit organization that is network as a local, trunk, or intemational exchange.owned by 350 member airlines and provides a variety TAT-8 Transatlantic Telephone-8, the first opticalof essential communications and data processing ser- transatlantic telecommunication cable brought intovices to its members via a global telecommunications service in late 1988 with terminals in Tuckerton, Newnetwork. Jersey (United States), Widemouth (England), and

sPK Stored-program controlled exchange, a switch- Penmarch (France). The final capacity of this fully dig-ing system in which the control logic is stored in soft- ital cable will be equivalent to 37,800 voice-grade cir-ware form in the memory of one or more digital com- cuits. The cable is jointly owned by telecommunica-puters. Changes can readily be made to such a tions administrations and carriers from severalsystem-to provide new services, for instance-by al- countries.tering or replacing the software. Tamnbon An administrative subdistrict in Thailand.

Speed conversion The conversion of the modulation Tandem office An exchange used in a large city torate of the received signal to a different modulation switch traffic between local exchanges that may not berate suitable for subsequent equipment. interconnected by means of direct trunks.

140 Glossary

TCC Jordan Telecommunications Corporation, the user with the right equipment and fed (downloaded)Jordanian state enterprise providing all public tele- into microcomputer storage via a communicationscommunication services. channel for execution.

TELEBRAS Telecomunicacoes Brasileiras SA., the Terms of trade The ratio of the index of export pricesstate-owned holding company of the Brazilian tele- to the index of import prices. When export prices risecommunications system formed of twenty-nine opera- faster than import prices, a country experiences anting companies in charge of public telecommunica- improvement in its terms of trade.tions services within each state, between states, and Toll service See Long-distance.intemationally. Traffic-sensitive costs Investment and operating costs

Telebanking A service which allows clients to carry (including depreciation and return on investment) as-out banking transactions from their home or business sociated with telephone company facilities, which varyover a communication network, such as videotex. in aggregate quantity with the volume of calls (and

Telecom Australia Australia's government-owned do- other measures of traffic) handled by the telephonemestic terrestrial telecommunications carrier. system. Included are the costs associated with com-

Telecom Canada A consortium of nine major tele- mon switching facilities in the local central officephone companies across Canada-British Columbia ("end office"), interoffice trunks that connect severalTelephone Company, Alberta Govemment Telephones end offices either directly or via an intermediate(AGT), Saskatchewan Telecommunications, Manitoba switching point, and intermediate or tandem switch-Telephone System (MTs), Bell Canada, New Brunswick ing systems used to route calls.Telephone Company, Island Telephone Company, Transparency The property of a digital transmissionMaritime Telegraph and Telephone Company Limited, channel, telecommunications circuit, or connectionand Newfoundland Telephone Company Limited--and that permits any digital signal to be conveyed withoutTelesat Canada, originally formed in 1931 to facilitate change to the value or order of any signal elements.the provision of coast to coast telephone service. Trunk The transmission circuit between two network

Telefax Facsimile service between subscribers' sta- nodes or switches.tions via the public switched telephone network of the Type I Class of Japanese telecommunications opera-intemational Datel network. tors and service providers that own their facilities.

Telemetry The transmission of instrument readingsor sensor data over a radio lInk, wires, or any other Typ .I Cls fJpnseeomnctosoea

or sensor data.over a radio link, w inform anti tors and service providers that lease facilities frommedium to a distant station at which the iormaon Type I carriers to provide service to the public.is recorded or interpreted. Tp rlr opolesrlet h ulcTs ecepgin Sometimespuseda UHFI Ultra high frequency, the range of radio frequen-

Telepaging Sometimesusedasasynonymofradtlepag- cies extending from 300 to 3,000 megahertz (MHz),ing. Telepaging is not a common term, at least in inldn teeiso chnes1ahog 3North America. including television channels 14 through 83.

Teleport A facility giving access to a satellite network Unbundled tariffs Tariffs in which each component ofor other long-haul telecommunications network. a communications service or product (called, by theThough usually connected to a building or real estate Fcc in its Computer 11 decision, a basic service ele-complex offering shared tenant services (such as a free ment) is priced separately, so that customers may se-enterprise zone or industrial park), a teleport some- lect only those components needed and be charged ac-times also services the greater regional commtnity cordingly.beyond the tenants of the individual development. Universal service The concept that every individual

Teleprinter An asynchronous terminal containing a within a country should have basic telephone servicekeyboard and a printing mechanism for sending and available at an affordable price. The concept variesreceiving alphanumeric information over a communi- among countries.cations channel. UNP United National Party, a political party in Sri

Teleservice A type of telecommunications service that Lanka.provides the complete capability, including terminal Usage-sensitive pricing (tariffs) A rate or price for tel-equipment functions, for communication between ephone service based on the rate of utilization otherusers according to protocols established by agreement than a flat (fixed) periodic fee; often used in respectbetween administrations or RPOAS. to some local services and called local measured ser-

Telesoftware A system for storing programs on page vice (LMs).in a teletext database so they can be captured by any US Sprint U.S. interexchange carrier, a major long-

Glwy 141

distance company that competes against AT&T. services generally require the digital tansmission rateFormed by the merger of GTE Sprint and U.S. Tele- of T-1 (1.544 Mbps) or higher.com, US Sprint is the third largest occ in terms of Videotex A generic tenn for a two-way interactivemarket share after AT&T and MCI. It offers nationwide service that provides data storage, retrieval, and pro-service. cessing. It combines a customer premises query de-

Value-added (enhanced) services: In general, services vice such as typewriter keyboard or touch-tone pad,that add value to a basic transmission service or mod- and a video display, such as a home TV set, that areify subscriber-supplied messages. There is, however, linked by the public telephone network to a computer-no simple definition of what is a value-added or an en- ized data bank or other information source.hanced service. The FCC advanced the following de- Voice mail Message and storage service; the telephonefinition of an enhanced service in its Computer 1 equivalent of electronic mail.decision: "The offering of computer processing Voice service A two-way service involving direct voiceapplications (in conjunction with, or as an enhance- communication between two or more persons, butment to, information transmission capacity) which act does not include a service in which the voice aspecton the format, content, code, protocol, or similar as- is limited to the coordination or setting-up of a datapects of the subscriber's information, or which permit service.storage and retrieval of information by subscribers." WATS Wide Area Telephone Service, a nationwide

VAN(s) Value added network(s), communications long-distance telephone service in North America, innetworks or systems which are enhanced or have which users contract for high-volume circuit usagevalue added through data processing such as protocol rather than paying for each call individually.and code conversion, storage, and forwarding. wATTc-88 World Administrative Telegraph and Tele-

Vertical integration The undertaking by a single firm phone Conference 1988, an intergovermmental confer-of successive stages in the process of production of a ence held under the auspices of the rru in late 1988particular good. in Melboume, Australia, to draft new international tele-

VHF Very high frequency, the range of radio frequen- communication regulations which will take effect oncies extending from 30 to 300 megahertz (MHz), in- July 1, 1990, and will provide the basic norms and ad-cluding television channels 2 through 13. ministrative mechanisms for the existing and future

Video conferencing A two-way telecommunications international telecommunications network and ser-service that allows "live" moving video images and vices.speech of participants in a conference to be transmit- X-bar exchange See Cross-bar exchange.ted between two or more locations. Video conferencing

Contributors

Robert Bruce is a partner in the Washington, D.C., office ment culminating with his appointment in 1982 as directorof Debevoise & Plimpton. From October 1977 to February general of telecommunications. He retired in May 1988.1981 he served as general counsel of the Federal Communi- Henry Geller is the director of Duke University's Washingtoncations Commission. Before joining the FCC Mr. Bruce prac- Center for Public Policy Research. From 1978 to 1981 heticed law in Washington, D.C., and from 1970 to 1972 was was assistant secretary for communications and informationdirector of communications planning for the Public Broad- and administrator of the National Telecommunications andcasting Service. He graduated from Harvard Law School and Information Administration in the U.S. Department of Com-received an M.P.A. from the John F. Kennedy School of Gov- merce. He was general counsel of the Federal Conununica-emment, Harvard University. He has lectured and written tions Commission from 1964 to 1970. Mr. Geller receivedwidely on communications law and policy and is co-author a B.S. degree from the University of Michigan in 1943 andof the comprehensive studies of telecommunications sbtuc- a J.D. degree from Northwestem University of Law intures entitled From Telecommunications to Electronic Ser- 1949.vices: A Global Spectrum of Definitions, Boundary LinesandStructures (London: Butterworths, 1986) and The Tile- John A. C. King became managing director, Citicorp Infor-con Mosaic: Assembling the New International Structure mation Business International and chairman of Quotron(London: Butterworths, 1988). Systems International in December 1988. He was previously

with British Telecom, which he joined in November 1983 asT. H. Chowdary is chairman and managing director of Videsh Board director responsible for marketing and corporateSanchar Nigam (India's overseas telecommunications carrier) strategy. During 1984 he was actively involved in the flota-in Bombay. He has a bachelor's degree in telecommunica- tion of British Telecom. In October 1985 he became manag-tions. He was director general of India's Departnent of Tele- ing director, Overseas Division, which specializes in offeringcommunications and held several senior positions, includ- telecommunications consultancy services, management ofing general manager of telecommunications in several states communications networks, and the provision of turnkeyof India. He was sent to Guyana as an nu senior expert and projects for developing countries. Educated at Brstol Uni-represented India in the ccm and plenary assembly and versity, he spent fifteen years with mm UK before joining rrrstudy groups. He has published mnany papers, popular arti- in 1976 in the United Kingdom and later in Brussels as acles, and essays in both India and overseas and participates director of the Business Systems and Communicationsregularly in broadcast media discussions on telecommunica. Group, Europe. Immediately before joining British Telecomtions policy issues. he was a director of Philips International, Telecommunica-

Daud bin Isahak was the first managing director of Syarikat tions Systems Division, based in Holland.Telekom Malaysia Berhad (sm), which took over the opera- Vernon L. B. Mendis has since February 1986 been chaimiantion of telecommunications in Malaysia from the Telecom- of the Telecommunications Board of Sri Lanka. Previouslymunications Department on January 1, 1987. He joined the he was regional director of uNEsco in Cairo and for thirtyTelecommunications Department in 1954 as a technical ap- years before that was in the Sri Lanka Foreign Service,prentice and later obtained a diploma from the Technical where he held the positions of high commissioner in Can-College, Kuala Lumpur, and a degree in electrical engineer- ada, high commissioner in the United Kingdom, and ambuning from Brighton Technical College in England. He held sador in Frnce. He was secretary-general of the Colombovarious psitions within the Telecommunications Depart.- Nonaligned Summit in August 1976. He is a profesional

142

3bntbutors 143

historian and author of several works on Sri Lankan and in electrical engineering with a specialization in communi-Asian history. cations. Before joining mmhL in April 1986 he was the chair-

Donald R. Murphy is telecommunications visiting fellow at man and managing director of Teiecommnunications Consul-the Wellington Institute of Policy Studies, Victoria Univer- tants (India) Ltd., a government company established bysity (general manager, Intemational, Telecom Corporation him under the Ministry of Communications to renderof New Zealand Ltd., at the time of the seminar). He joined consultancy and engineering services in telecommunica-the New Zealand Post Office in 1955 after receiving his bach- tions in many countries of the world. He has held severalelor of engineering degree at Auckland University. He important positions in the Department of Telecommunica-worked in various capacities in telecommunications and was tions and in Indian Telephone Industries Ltd.director of the Post Office Savings Bank in 1981. Peter A. Stern is director, inu and Commonwealth Division,

Nobuyoshi Mutoh is director of INTELSAT Relations, Satellite, TELEGLOBE Canada Inc., Canada's intemational telecornmu-and Radio Communications Department, XDD (deputy direc- nications carrier in Montreal. He has a B.A.Sc. in electricaltor of International Affairs Department at the time of the engineering from the University of Toronto, a Ph.D. fromseminar). He graduated from Keio University and in 1964 the Universit4 de Paris, and an MA. in economics fromjoined KDD, where he has worked in the Corporate Planning, Concordia University in Montreal. Most recently he has beenSubmarine Cable Systems, and Intemational Affairs depart- inolved in the administration of the Commonwealth Tele-ments. He is governor for Japan on the INTELSAT Board of communication Organization's Program of DevelopmentDirectors. and Training and in preparatoiy activities for the rru's 1988

World Administrative Telegraph and Telephone ConferenceKarl-Heinz Neumann has been director of the Wissenschaft- (WATT-1988)liches Institut fiir Kommunikationsdienste der DeutschenBundespost (Research Institute for Telecommunications and Richard D. Stern is currently chief, Industry, Trade, and Fi-Postal Services of the German prr) since 1982. wIX is respon- nance Division, China Departnent, World Bank, Washing-sible for economic research in the Bundespost and partially ton, D.C. Since joining the Bank in 1971 Mr. Stern has heldfor strategic analysis. Before joining the Bundespost Dr. a variety of responsibilities in East Africa and Southeast Asia,Neumann was a researcher at the University of Bonn, special- including those of chief of the Indonesia Division, and wasizing in public and telecommunications economics. He re- for four years chief of the Telecommunications Division. Mr.ceived a Ph.D. in economics from the University of BOM Stem was trained as a development economist at the univer-

Timothy E. Nulty is a senior economist at the World Bank sities of Southampton and Sussex, England.in Washington, D.C. He received his Ph.D. in economics Toru Uehara is senior vice-president for international affairsfrom Cambridge University. Before joining the Bank in at Nippon Telegraph and Telephone Corporation (Nrr). He1985, he spent eight years as chief economist of, first, the graduated from the National University of Telecommunica-Senate Commerce Committee and then the House Energy tons in Tokyo and has a wide range of experience in tele-and Commerce Cormnittee of the U.S. Congress, and for hvo commTuunications and particularly data communicatiorsyears was a senior official with the Carter administration. businesses as well as in international cooperation. He hasPrior to that he worked in East Africa and Pakistan, taught acted as a consultant in Kuwait's Pnr telecommunicationeconomics at Durham and Oxford universities, and was chief project and as coordinator of an ITU senior expert team foreconomist of the United Auto Workers. Since coming to the Saudi Arabia rrf. He was director of NTT's New York of-Washington he has been intimately involved in the develop- fice.ment of telecommunications policy, including all major leg- Mel K. Ward is managing director of Telecom Australia andislative efforts, and has also been active in the fields of en- chairman of Telecom Australia (Intemational) Ltd. His de-ergy, trade, and industrial policy. grees include a bachelor of engineering and master of engi-

Eric Schneidewind is managing partner of the Lansing, neering science from the University of Queensland, Aus-Michigan, office of Varnum, Riddering, Schmidt & Howlett, tralia. Mr. Ward has spent twenteight years in thewhere he has maintained an energy and telecommunications telecommunications industry and has been involved inpractice since December 1985. He served as a member of the leading-edge technology and commercial and managerialMichigan Public Service Commission from 1979 through change, which has contributed to Austria's standing in the1985 and was its chairman from 1981 through 1985. Mr. international telecommunications auena.Schneidewind graduated from the University of Califomia Bjam Wellenius is principal telecommunication specialistat Berkeley and received a J.D. degree from the University of (senior economist at the time of the seminar) with the WorldMichigan. His telecommuunications practie has included Bank in Washington, D.C. He has a Ph.D. in telecommunica-work for municipal and educational institutions in the tions from the University of Essex, England, and an engi-United States as well as consulting work for the govem- neering degree from the Universidad de Chile. Before joiingments of Canada and Sri Lanka the World Bank in 1979 he was profesor of telecommunica-

M. P. Shukla is the managing director and chief execu- tons at the Univeruidad de Chfle. He has published widelytive officer of Mahanagar Telephone Nigam Ltd. (tmmL), a in the field of telecommunications and development and isgovemment company in ndia under the Ministry of Com- co-author of hkeommumtcats and Rownoc De'*lop-munications that manages and operates teleconununica- ment (Baltimore, Md.: Johns Hopkins Univrsity Press,tions services in Bombay and New Delhi. He is a graduate 1983).

Participants in the Seminaron Telecommunications Sector Restructuring and Management,

Kuala Lumpur, November 17-19, 1987

Dato Paduka Awg HaJi Abdullah bin B.M.D.P. Haji Bakar Daud bin IsahakDirector of Telecommunications Managing DirectorJabatan Telekom Brunei Syarikat Telekom Malaysia BerhadBandar Seri Begawan Kuala Lumpur

Victor Africa Graham DaveySupervising Partner Area Representative, South East AsiaRilloraza, Africa, Deocompos, Africa Law Offices Intemational Telecommunications UnionManila Jakarta

Jose Luis A. Alcuaz K. U. FaruquiCommissioner SecretaryNational Telecommunication Commission Ministry of CommunicationQuezon City IslamabadHaji Mohamed Ali bin Yusof Henry GellerDirector General DirectorJabatan Telekom Malaysia Washington Center of Public Policy, Duke UniversityKuala Lumpur Washington, D.C.Robert Bruce Maurice GClham

Partner impRegional Director, Intemational RelationsDebevoiser & PlimptonBritish Telecom Intemational

Washington, D.C. LondonAmnon J. Golan

Buntar bin Osman Director, Asia Technical DepartmentSenior Telecommunications Executive Engineer World BankTelecommunications Department Washington, D.C.Bandar Seri Begawan Haji Othman HitamPeter Chang Director of FinanceCoordinator, nu and Commonwealth Division Syarikat Telekom Malaysia BerhadThLECoDE Canada, Inc. Kuala LumpurMontreal Kan Kai Li

T. H. Chowdary Deputy Director, Economic and TechnicalChirman and Managing Director Development Centre'Mdesh Sanchar Nigam Ministry of Posts and TelecommunicationsBombay Beijing

Graham H. Cunnold John A. C. KingGeneral Secretary Managing Director, Overseas DivisionCommonwealth Telecommunications Organisation British TelecomLondon London

144

Partkimt, In the Seminar 145

Hugh Lantzke Tan Sri Dato' Dr. Mohd Rashdan bin Haji BabaTelecommunications Engineer ChairmanWorld Bank Syarikat Telekom Malaysia BerhadWashington, D.C. Kuala LumpurLee Eung-Hyo Mohd Radzi bin MansorExecutive Vice President Executive DirectorKorea Telecommunication Authority Syarikat Telekom Malaysia BerhadSeoul Kuala LumpurJosefina Trinidad Lichauco V. S. RaghavanUndersecretary for Communications Division Chief, Asia RegionDepartrnent of Transportation and Communication World BankManila Washington, D.C.Suthorn Limpisthien M. Bernard RodrigoPresident Director of TelecommunicationsCommunications Authority of Thailand Overseas Telecommunication ServiceBangkok ColomboKen V. Loughnan Rusli HabibExecutive Director General Manager, Telecommunications Training CentreTelecom Australia (International) Ltd. Syarikat Telekom Malaysia BerhadMelboume Kuala LumpurShanmugam Manickam Terrefe Ras-WorkAssistant General Manager Special Policy AdviserSyarikat Telekom Malaysia Berhad International Telecommunication UnionKuala Lumpur GenevaVernon L. B. Mendis Shamsuddin bin Mohd RasomShairman General Manager, InternationalCo Lanka Telecommunications Board Syarikat Telekom Malaysia BerhadWiolombo Kuala Lumpursid Moenandir Pg. Sharifuddin bin Pg. Metali

President Director Economic Planning UnitBerumtel Telekomunikasi Ministry of FinanceBandung Bandar Seri BegawanDonald R. Murphy Paner SeGeneral Manager, International Peter ShoreTelecom Corporation of New Zealand Ltd. Orpoat Development ManagerWellington Overseas Telecommunication Commission (AustraliaNobuyoshi Mutoh Sy huneyDeputy Director, International Affairs Department M. P. ShuklaKokushai Denshin Denwa Co. Ltd. Managing Director and Chief Executve OfficerTokyo Mahanagar Telephone Nigam Ltd.Peter R. Nelson New DelhiRegional Director Sabbir Ahmad SiddiqiBritish Telecom Director GeneralHong Kong Pakistan Telegraph and TelephoneMohd Noor bin Haji Harun IslamabadDirector, Economic Planning Unit Cesar L. SisonPrime Minister's Department Executive Vice-PresidentKuala Lumpur Philippine Long Distance Telephone Co.

No Soo Kin ManilaResearch Engineer Peter A. SternKorea Telecommunication Authority Director, ITU and Commonwealth DivisionSeoul IEGLOBE Canada, Inc.

Timothy E. Nulty MontrealSenior Economist, Europe, Middle East, Richard D. Stemand North Africa Region Division Chief, Asia Region

World Bank World BankWashington, D.C. Washington, D.C.

146 Participants in the Seminr

Suhana F. L. Walker, oBESenior Expert Staff to Minister Director, Far East and PacificMinistry of Tourism, Post and Telecommunications Cable and Wireless PLCJakarta Hong Kong

Srikham Swat Mel K. WardDirector of Telecommunications Network Managing DirectorTelephone Organisation of Thailand Telecom AustraliaBangkok MelbourneToru Uehara BjOrn WelleniusSenioru Vie-President Principal Telecommunications Specialist, Asia RegionSenior Vice-President WrdBnNippon Telegraph and Telephone Corporation Washington, D.C.

Dietrich WestendoerpfSurind Vanichseni Executive DirectorDeputy Managing Director Centre for Telecommunications DevelopmentTelephone Organisation of Thailand GenevaBangkok Zhang Uqui

Christopher C. Vonwiller Deputy Director General, TeleconmmunicationGeneral Manager, Corporate AdministrationOverseas Telecommunication Commission (Australia) Ministry of Posts and TelecommnunicationsSydney Beijing

THE WORLD BANK

Powerful technological and market forces that swept through the telecommunications sector ofmost industrial countries in the 1980s are now beginning to appear in developing countries. Thegrowing demand for better, more varied, and less costly communications services raises complexquestions about the policy framework, structure, and regulation of the sector. This volumereviews these issues and presents the experiences of various countries-both developed and devel-oping-that have restructured their telecommunications sector to adjust to the changingenvironment.

The authors, many of whom are chief executives or senior managers of telecommunicationsenterprises, discuss the problems they share and explore the remedies they have tried. A commonproblem in developing countries, for example, is underinvestment in telecommunications. As aresult there is a large unmet demand not only for basic services but also for the advanced servicesneeded by modern businesses to compete successfully in the world market. In addition, poororganization and management of telecommunications has resulted in badly maintained facilitiesand unreliable service. To help solve these problems, many countries are considering alternativesto the traditional state monopoly. This book describes in detail the search for ways to increase theautonomy and commercial orientation of public enterprises, attract private participation, andintroduce competitive discipline.

The material presented here is expected to facilitate the dialogue both among governmentauthorities responsible for telecommunications policy and with the operating entities, main users,potential investors, and other participants in the telecommunications business. The book mayalso give international agencies a better understanding of how to address the inadequacies oftelecommunications that are holding back the economic and social development of poorcountries.

Bjorn Wellenius is principal telecommunications specialist in the Asia Technical Department ofthe World Bank. Peter A. Stern is director of the ITU and Commonwealth Division of TELEGLOBECanada Inc. Timothy E. Nulty is a senior economist in the Europe, Middle East, and NorthAfrica Country Department IV of the World Bank. Richard D. Stern is chief of the Industry andFinance Division in the China Department of the World Bank.

Of related interest

The Pnvate Provision of Public Services in Developing CountriesGabriel Roth. Published for the World Bank by Oxford University Press.

ISBN 0-8213-1198-0

u-3.21 2 V 98-08 PFs[Llr, SMIPNA', i TLO

SA _ ar ' I 4 flC2 131

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