State, Policy, Regulation & MarketDr. Alison Gillwald Executive Director: Research ICT AfricaAdjunct Professor: UCT Graduate School of Business, Management of Infrastructure Reform & Regulation

Post graduate executive certificate: ICT Policy & RegulationPolytechnic Namibia

1

Outline• Separation of powers- interplay between state and

market

• From public utility to network industry

• Network industries and natural monopoly aspects

• Changing market structure of network industries

2

Separation of powers• Policy making - State (executive) • Regulation – Autonomous regulator (national

regulatory agency NRA)• Operation – Commericalised/ privatised operator -

Market

3

Governance and changing nature of the state• Erosion of traditional domestic political power bases

• Global trends of democratisation and liberalisation

• Uneveness of this development

• Changing nature of the state

• Empirically governance reflects state’s ability to adjust to rapid changes in its environment in late 20th C

4

Government to governance• Conceptual or theoretical representation of role of state in co-

ordination of social systems (self-governance, networks and partnerships)

• Political institutions no longer exercise a monopoly on the orchestration of governance.

• Post-war state overburdened + 80s/90s financial crisis and resultant deregulation of capital markets.

• Maintain public service levels through shared responsibilities between state and civil society.

• Co-ordination problems in increasingly complex globalised economy and society

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Government to governance (2)• Weakness of modern governments• Challenges democratic notions of the nation-state as effective

institutional channels for participation of citizenry and accountability

• move from more vertical, centralized system of government associated with command and control to more horizontal, participatory systems of governance, more suited the engaging with a network economy.

• New forms of governance imply interaction with partners so that policy formulation and regulation becomes part of a joint effort which takes place in the public sphere

• Global economic crises, reregulation, centralisation

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Governance in the regulatory state• Institutional diversity (number and character) - Institutional fragmentation

• Distribution of responsibility (inefficient or checks and balances)

• Power structure (less centralised power structures - delegation mechanisms, veto players and time-stablisers - effective autonomy over decision-making?)

• Individual/collective decision-making procedures

• Political culture - shared practices and values

• Policy dominance, consensus formation, policy coherence

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Rise of regulatory state• Technocratic response to lack of expertise of policy makers

(Majone)

• Supremacy of business and credible commitments (Poulantzas, Lindblom)

• Dynamics of trust, transparency and accountability (Fukuyama, Moran, Gibbons)

• Focus on rise of autonomous agencies separate from operational functions to steer public activities (Moran)

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Network industries and natural monopoly aspects

• Historically, utilities considered ‘natural’ monopolies• Natural monopoly exists if the least cost production of the total market

demand is achieved by the existence of a single firm. • Impractical or inefficient to duplicate• Changes over time due to technological advances, from vertically

integrated chain of supply to isolated network component• Throughout the world: telecommunications, electricity, natural gas and

water granted legal monopoly status• More recently, natural monopoly restricted to grid• Introduction of competition in other parts of the market, e.g. VANs in

telecoms, electricity generation and retail etc

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Changing market structure of network industries

• Historically: public-owned vertically- integrated monopoly provision of services, more recently:

• Competition in up- and / or downstream markets• … + Vertical integration, or• …+ Vertical separation with independent infrastructure, or• …+ Joint ownership of infrastructure• Competing vertically integrated firms

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Perfect Competition

• Markets with ‘perfect competition’:• Structure and requirements:

• many buyers, many sellers• Complete transparency• Homogeneous goods• Conduct and performance• Incentives to lower prices and costs• Incentives to innovate• ‘Normal’ returns to firms in this risk-class

• But, there are market failures:• natural monopolies, • information asymmetries, • public goods etc

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Parliament

Ministry

Informs laws

Regulator &Competition Commission

Stake-holders/

Civil society/

Consumers, citizens,

operators, service

providers, academia,

unions

inputs

initiates & formulates

Policy Formulation

Process

inputs

Ministry of Communication develops overall policy for the telecommunications sector from which Department develops

strategies

It is required that the regulator and competition authorities are consulted and that public hearings are held before a policy is gazetted. Once it is a bill Parliament, through a multiparty

parliamentary committee, will also hold public hearings before pasing the law

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Parliament

Ministry

Informs laws

Regulator &Competition Commission

Stake-holders/

Civil society/

Consumers, citizens,

operators, service

providers, academia,

unions

inputs

initiates & formulates

Policy Formulation

Process

inputs

The Parliaments passes laws based on policies

The Minister can provide policy directives to the regulator between major policy reviews.

laws

policy

directives

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Parliament

Ministry

Informs laws

(institutional arrange-ments)

Regulator

Competition Commission

Universal Service Agency

Market Structure

conduct

laws

policy

directives

Civil society

Stake-holders/Consumers,

citizens, operators,

service providers, academia,

unions.

inputs

initiates & formulates

regulation

Policy Formulation

Process

inputs

The policy determines the institutional arrangement for the sector - the degree of autonomy of the regulator, competition commission

and USA - through the appointment process, funding, and delegation of powers.

The policy also determines the market structure through requiring the regulator to licence certain categories of operators/service

providers and exempting others. Market conduct is in response to the market structure and determines the nature of the regulation.

licensing

market failure

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Parliament

Ministry

Informs laws

Regulator &Competition Commission

Market Structure

conduct

laws

policy

directives

Civil society/

Stake-holders/Consumers,

citizens, operators,

service providers,academia,

unions.

inputs

initiates & formulates

regulationPolicy

Formulation Process

inputs

Policy outcomes: competitiveness - choice, prices, quality of infrastructures, services and products

The performance of the sector - competitiveness reflected in access, range choice of services, price and quality - is the outcomes of the policy and legal framework and creates the conditions either

conducive to investment in the sector or not.

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Termination Rates US cents

Jan 2009 July 2009 Jan 2010 July 2010 Jan 2011

4.105.50

6.808.20

9.00

4.105.50

6.808.20

14.40

MTR FTR

Table 7: January 2012 OECD Low User Basket costs in USD (FX= average 2010)Table 7: January 2012 OECD Low User Basket costs in USD (FX= average 2010)Table 7: January 2012 OECD Low User Basket costs in USD (FX= average 2010)Table 7: January 2012 OECD Low User Basket costs in USD (FX= average 2010)Table 7: January 2012 OECD Low User Basket costs in USD (FX= average 2010)Table 7: January 2012 OECD Low User Basket costs in USD (FX= average 2010)

Country Name Cheapest product from Dominant OperatorCheapest product from Dominant Operator Cheapest product in countryCheapest product in country

% cheaper than dominant Country Name Rank US$ Rank US$

% cheaper than dominant

Mauritius 1 2.39 5 2.39 Dominant is cheapestEthiopia 2 2.61 7 2.61 naNamibia 3 2.74 8 2.74 Dominant is cheapest

Kenya 4 2.85 1 1.90 33.4%Egypt 5 2.91 9 2.91 Dominant is cheapestSudan 6 3.53 6 2.46 30.5%Ghana 7 3.87 11 3.28 15.1%Libya 8 3.90 14 3.90 Dominant is cheapest

Rwanda 9 4.28 3 2.16 49.4%Guinea 10 4.62 2 1.93 58.1%

Sierra Leone 11 5.04 13 3.88 23.1%Uganda 12 5.51 10 2.94 46.6%

Congo Brazaville 13 5.63 17 5.63 Dominant is cheapestTanzania 14 5.82 12 3.75 35.7%

Algeria 15 6.21 4 2.28 63.3%Tunisia 16 7.24 18 6.46 10.9%Senegal 17 8.11 24 8.11 Dominant is cheapest

Botswana 18 8.16 20 7.66 6.0%Sao Tome &Principe 19 8.21 25 8.21 Dominant is cheapest

Nigeria 20 8.40 16 5.22 37.8%Madagascar 21 8.45 27 8.45 Dominant is cheapest

Mali 22 8.78 29 8.78 Dominant is cheapestBurkina Faso 23 8.88 28 8.53 4.0%

Benin 24 9.10 22 7.92 13.0%Mozambique 25 10.00 33 10.00 Dominant is cheapest

Chad 26 10.14 34 10.14 Dominant is cheapestD.R. Congo 27 10.37 19 7.62 26.5%

Côte d’Ivoire 28 10.41 36 10.41 Dominant is cheapestCameroon 29 10.44 35 10.28 1.5%

South Africa 30 11.07 32 9.83 11.2%

15+ mobile phone ownersSouth Africa

GhanaNamibiaUganda

TanzaniaCameroon

RwandaEthiopia 18.3%

24.4%44.5%

35.8%46.7%

56.1%59.5%

86%

3.2%9.9%

36.5%21.5%

27.0%49.3%

59.8%62.1%

2007 2011

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Sout

h Afri

ca

Nam

ibia

Ghan

a

Ugan

da

Tanz

ania

Cam

eroo

n

Rwan

da

Ethio

pia

2.0%3.5%

15.1%

1.9%4.8%

10.0%13.0%

26.8%Do you use a computer (Desktop or laptop)?

At home

Work

Internet Cafe

School, University

At a friends place

Library 6.3%

15.4%

21.9%

25.8%

40.9%

64.7%

South Africa

Where do you use the computer?

At home

Work

At a friends place

School, University

Internet Cafe

Library 20.0%

20.1%

25.6%

31.4%

43.0%

53.3%

Namibia

Ownership and use of computer

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Households with Internet Connection...

0

5

10

15

20

South Africa Namibia Ghana Cameroon Uganda Tanzania Rwanda Ethiopia

0.50.70.80.91.3

2.7

11.5

19.7

20

Internet going mobileSouth Africa

Namibia

Ghana

Uganda

Tanzania

Cameroon

Rwanda

Ethiopia 0.9%

3.6%

3.6%

1.9%

3.6%

8.0%

13.4%

22.0%

0.8%

3.1%

9.3%

1.3%

3.2%

5.6%

7.3%

18.9%

Total population using a computer for browsing the InternetTotal population using a mobile phone for browsing the Internet21

Type of Internet connection used by Household...

0

20

40

60

80

ISDN ADSL 3G Mobile Phone Wireless

34.8

75.3

59.8

4.5

16.3

7.5

56.454.8

22

4.9

South Africa Namibia

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Rationale for regulation

Changing market structure with competition

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Interplay between competition and telecom regulation• Regulation is ‘ex ante’ and competition policy is ‘ex post’ (except merger

control)

• Regulation tends to define market structure with impact on effective and potential competition

• Regulation is aimed at ‘mimicking’ competitive outcomes in the absence of competition

• As competition is introduced less regulation of certain aspects is required

• Generally upstream and downstream,

• Excluding access, safety requirements and technical standards

• Focus shifts from preventing monopoly abuse in retail to interconnection and public service obligation

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Rationale for regulation

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Why regulate? (1)• Public interest• Market absence of failure• Monopolies and natural monopolies • single seller, no substitutability, market entry and exist difficult• Reduced output, higher prices, transfer of income from consumers to

producers• Externalities• Spillovers- price of a product does not cost true cost to society• Information inadequacies• Continuity and availability of services• Toughs and cream skimming

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Why regulate? (2)• Anti-competitive behaviour and predatory pricing

• Public good, free riding and moral hazard

• Scarcity and rationing - regulating short supply

• Distributional justice and social policy

• Market allocative efficiency to maximise welfare, but not within groups/individuals in society

• Rationalisation and co-ordination

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Objectives of regulationImplement policy - Contribute to economic growth, development - critical service to other sectorsPromote universal access to basic telecommunications services Foster competitive markets to promote:

efficient supply of telecommunications services good quality of service advanced services, and efficient prices

Prevent abuses of market power (excessive pricing and anti-competitive behaviour by dominant firms)Create a favourable climate to promote investment to expand telecommunications networks Promote public confidence in telecommunications markets through transparent regulatory and licensing processes Protect consumer rights, including privacy rights Promote increased telecommunications connectivity for all users through efficient interconnection arrangements Optimize use of scarce resources, such as the radio spectrum, numbers and rights of way

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Tools of RegulationPrice Regulation (Wholesale and Retail)

Rate of ReturnPrice Caps

Entry control (Licences)Various types of licences with various powers and obligations Vertical separation (e.g. AT&T, Open Reach BT)Legislative prohibition: Rules compelling operator to provide interconnection and governing the provision of that interconnection through to full unbundling of network components)Transparency

Prescribing cost accounting proceduresRequire operators to publish prices of products for usage baskets

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Best practice regulation

• Legislative mandate• Accountability• Due process• Expertise• Efficiency• Trade off of claims

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Dynamic issues in RegulationRegulatory lag: A lag between rate reviews = incentives for cost reduction under rate of return regulation, more profit...Ratchet effect: The use of information on past profits in deciding future price caps lowers incentives in price cap regulationOperator might act contrary to regulators objective :

Lowering the quality of access to the network (delay upgrades that allow rival to offer new services, degrading rival quality)Increasing their access price to the network (refusing to unbundle network components, require rivals to get interface equipment)Denying access to the network altogether (arguing that no spare capacity, tech choice that favours own operations)Tying: Monopolist can make sale of regulated service dependent on purchase of unregulated service. This permits pricing above MC on unregulated service as tie prevents competitive entry

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Regulatory sector reforms• Privatisation - attract investment for network extension, efficiency,

government revenues• Licensing competitive operators - expand range of service, unserved

markets,improve sector efficiency, drive down prices, stimulate innovation, government revenues.

• Transparent regulatory framework - increase credibility, gov revenues, market confidence, investment.

• Mandatory interconnection and unbundling of PSTN - remove barriers to competition

• Price cap regulation - incentive based, great efficiency, reduce regulatory lag.• Universal access - replace less transparent and potentially anticompetitive

subsidies.• Removal of barriers to international trade/excise duties. (Intven 2000)

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Exercise• Consider each of the sector reforms in the

previous slide and consider if they are policy, regulatory or operational reforms and how they have been implemented or not in Namibia.

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References• Baldwin and Cave (1999)

• Evans (1995)

• Fukuyama (2005)

• Jordana and Levi-Faur (2004)

• Levy and Spiller (1996)

• Noll, R (1996)

• Moran, M (2002) Understanding the Regulatory State

• Pierre (2000)

• Majone (1997)

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