The Consumer Welfare Gains of Guatemala’s Liberal Reforms

Thomas W. Hazlett, Giancarlo Ibarguen S. and Wayne A. Leighton

Presentation to“Convergence or Competition?

Radio Spectrum Management in Guatemala and Latin America”

June 9th and 10th, 2005Francisco Marroquín University

Guatemala City, Guatemala

The opinions expressed here are those of the authors and do not represent the views of any of

the institutions with which they are affiliated.

Liberalization Is Not Always Popular, Two Latin American Countries

Lead the Way

Comments on a report by Ronald Coase and other economists at the Rand Corporation, circa 1960:

“This is a remarkable document… Time somehow has left the authors behind. They ignore the social, cultural, and political values which have come to inhere in mass communications, in particular, broadcasting, as well as fifty years of administrative law developments… I know of no country on the face of the globe – except for a few corrupt Latin American dictatorships – where the ‘sale’ of spectrum could even be seriously proposed.” (Coase, J. L. & Econ. Oct. 1998)

The Guatemalan Spectrum Privatization Experiment:

Why It’s Important

1. Offers “proof of concept” for spectrum privatization (Coase 1959)

2. Reform by legislation, not regulation3. Offers evidence in understanding optimal

property rights regimes – how to define the rights, how they work or don’t work. - These lessons are applicable to both developed and developing countries.

Guatemala’s Reforms:The Short Story

• Private property rights defined sparingly

• Dispute resolution is mostly a minor factor; incentives exist to overcome interference

• The mobile telephony market shows that Guatemala has been relatively successful in promoting consumer welfare

The Guatemalan Experience

• Guatemala: In 1996, the Ley General de Telecomunicaciones allocated spectrum in three categories:

1. reserved for government use

2. reserved for amateurs

3. ‘regulated’ (liberalized) bands

The Reserved Bands

• For government use: 1,335 MHz in total

[1000 MHz reserved from 3 MHz to 3000 MHz]

• For amateur use: 4,761 MHz in total

[about 12 MHz reserved from 3 MHz to 3000 MHz]

These parties receive an AUF - autorización de uso

de frequencia - which cannot be sold or transferred

The ‘Regulated’ or Liberalized Bands

Parties receive a TUF – título de usufructo de frecuencia – which can be traded and has flexibility under technical constraints

TUFs describe: schedule of operation, area

of operation, max transmission power, and

max interference at border of coverage area

TUFs v. Licenses

• In general, a spectrum license is a right to a particular use. With some spectrum, a licensee may choose among several uses.

• A TUF is essentially a property right, with the freedom to use the spectrum as one sees fit, subject to technical restrictions.

Allocating TUFs

• Parties submit requests, government must publicly announce request in three days

• Only reasons for denial: violation of int’l treaties, or existing right is held by another

• Third parties may oppose, but must do so within 5 days of end of public announcement

• Within 15 days, an auction is announced, which takes places within 20 days

El Salvador

Reform, functionally similar to Guatemala

• Also enacted via statute, not regulation

• Grants concessions, not TUFs, but they are very flexible

• Left ITU spectrum allocation template in effect but enacted rule change to permit full flexible use in licensee’s allocated frequency space

El Salvador

Concessions describe: schedule of operation; area of operation; nominal power of transmitting stations; maximum intensity of the electrical field surrounding the covered area; modulation type; the type, gain, and pattern of the radiation of the antennae of the transmitting stations; the type, gain, and pattern of radiation of the antennae of the receiving stations in the event they must be protected; the altitude and location of antennae above ground and above sea level…

Guatemala: TUFs Auctioned and Traded

TUFs traded: 1,621 (or 41 percent of total)

Results: Mobile TelephonySource: Superintendencia de Telecomunicaciones (SIT)

338,490

856,831

1,146,423

1,577,085

2,034,777

429,712517,000 610,701

676,631 756,085845,968 944,140

1,132,121

3,168,256

64,194 111,445

1997 1998 1999 2000 2001 2002 2003 2004

Telefonía Fija Telefonía móvil

Guatemala’s Subscriber Growth:Best in Latin America

Average Annual Growth Rate for Cellular Subscribers, 1997-2002 = 89.7 percent

(Source: International Telecommunications Union)

Guatemala Has One of the Lowest Mobile Telephony Rates in Latin America

• per-minute mobile rates, in-country, approximately US $0.12 (per ITU)

Spectrum Allocation to Mobile Telephony in Latin America

0

50

100

150

200

Argen

tina

Bolivia

Brazil

Chile

Colom

bia

Ecuad

or

El Salv

ador

Guate

mala

Hondu

ras

Mex

ico

Nicara

gua

Panam

a

Parag

uay

Peru

Urugu

ay

Venez

uela

Guatemala’s Low Prices Are Statistically Significant

Liberalization and Wireless Growth Across Latin America(Dependent Variable is Growth Rate of Total Wireless Traffic)

RHS Variables Model 1 Model 2 Model 3 Model 4

Fixed Line Price of Local Call (3 min) -597.28(1.17)

-1013.7(1.66)

-185.63(0.43)

-246.07(0.54)

Growth of GDP per capita -3.26(1.39)

4.767(0.66)

-2.90(1.19)

-5.176(1.10)

Average Price of Wireless service (US$/min)

-2091.6(6.92) a

-2161.2(7.28) a

-2196.6(7.34) a

-2133.9(6.40) a

Liberalized Spectrum 1411.8(7.80) a

1669.3(6.04) a

1454.7(7.94) a

1368.3(5.56) a

Lag Level of Fixed Line Penetration -40.49(3.28) a

-23.03(1.21)

-43.23(3.50) a

-46.40(3.18) b

GDP (billion US$) 0.149(1.35)

0.372(1.73)

GDP per Capita (PPP US$) -104(1.18)

0.027(0.55)

R-Squared 0.973 0.971 0.972 0.973

No. Observations 30 30 30 30

Market Share, Mobile Telephony

Source: Superintendencia de Telecomunicaciones (SIT),

as of December 31, 2004

Sercom 42.41%

Bellsouth 12.32%

Telefónica 14.90%

Comcel 30.37%

What Consumer Welfare Gains Really Mean

Results: Broadcast The Perennial Special Case

• Existing broadcasters until the end of 1996 received free TUFs

• Additional parties could apply, subject to the non-interference rules

• For TV and radio, spacing extremely tight, allowing for more users. Exactly 50 TUFs in the FM bands: 88.1, 88.5, …107.7

Problems with the Guatemalan Experiement

• Not many, as predicted by critics

• No “chaos in the market” – especially in the highly valued mobile telephony uses

• Still a need for enforcement, especially with TUFs used for broadcasting

• Thus, still a potential for political discretion (but this is lower than other countries)

Outstanding Issues:Protecting Property Rights, Avoiding Political Discretion

Example: Pirate Radio

Pirate Radio:

Unauthorized use of spectrum, especially pirate radio, has been a problem. At one time, estimates of up to 400 pirate users within Guatemala.

Authorized users argue that Guatemalan regulator, the SIT, faces political pressure to not enforce against illegal users.

Political Discretion:

When there is political discretion, rights are not well-protected, and incentives for efficient use are lessened as a result.

Guatemala has very little of this problem, as compared to most any other country. The lack of enforcement against pirate radio is the only significant exception.

Lessons for Policymakers:

→ increasing the rights associated with the spectrum increases use

and efficiency …

→ which creates consumer benefits → but rights must be protected…

→ against other users, and against rent appropriation, and

The Overlooked Lesson:Flexibility is Feasible and Efficient, and

Property Rights Do Not Mean Chaos

• With the traditional approach, regulators determine what services are appropriate for given bands. A licensee can offer only those services that are allowed.

• Guatemala turned this approach on its head. Regulators determined the broad technical rules. A licensee can offer any service that is consistent with these rules.