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Telecom Reform: Progress and Prospects

William H. Melody Delft University of Technology & LIRNE.NET

(Published in Telecommunications Policy 23 (1999) 7-34)

Abstract

The dominant activity in telecom reform is now shifting from policy development to implementation. This is a more difficult task that depends heavily on competent, independent regulation in both developed and developing countries. A speed up in the remaining steps to complete full institutional restructuring is needed, including clarification of the roles for national and regional regulation and for international governance. New national regulators must rapidly establish transparent participatory processes and decision criteria to minimise uncertainty and enhance credibility. Experience to date indicates that competition in reality may be a more limited instrument of policy than it has been in theory, and the goal of a global universal service will remain elusive unless given a higher priority in policy and practice. Telecom reform is leading to increasing integration of telecom with other sectors of the economy, and telecom policy with broader economic and social policy. Telecom networks are providing the foundation of information infrastructures, which in turn are rapidly becoming an indispensible component of the 21st century knowledge infrastructures. For the future, telecom policy and regulation must facilitate knowledge network development in new knowledge-based economies and societies. This raises a question whether telecom regulation should assume a more proactive role in facilitating new network service applications, especially in the public sector.

Keywords Reform, policy development, policy implementation, information infrastructure, telecom reform, convergence

1.0 Introduction

In many respects 1998 marks a turning point in the telecom reform process taking place throughout the world. Although each country is proceeding at its own pace through its own specific reform process, all countries are influenced to varying degrees by the dramatic changes in technologies, markets and the global economy. All countries are influenced as well by developments in neighbouring countries, trading partners, regional and international agencies. Telecom reform has been the order of the day almost everywhere for some time now. Until 1998 the dominant reform activities were policy development, drafting legislation and restructuring traditional PTTs and government ministries, i.e., preparing the ground for policy implementation. Developing policy papers, passing one or more rounds of legislation, corporatising, privatising, establishing conditions for licensing competitors and creating new regulatory agencies have been the major activities.

To be sure, in some countries and for some services competition policy has been in the implementation phase for some time. The US Federal Communications Commission (FCC) first approved MCI as a competitor to AT&T 30 years ago, and the AT&T divestiture went into effect 15 years ago. But local distribution services in the US were not liberalised until 1996. Mobile and value-added internet services have shown explosive growth in liberalised markets in some countries, but not in others. And some countries have yet to pass the appropriate legislation, establish a regulator or license a competitor.

The reason 1998 can be seen as a time of transition from the policy development to the policy implementation phase is primarily because of three major market liberalising events. First, the WTO agreement on telecom services by which 69 (now 72) countries representing 90% of global telecom traffic committed themselves to specific programs of liberalisation over specified future periods. Second, the European Union (EU) policy on full liberalisation of telecom services in member states came into effect. Third, the US Telecommunications Act of 1996, which liberalised local markets (thus bringing full liberalisation in the US), seemed ready for implementation following an FCC ruling establishing the appropriate guidelines. In addition, a large number of other countries took specific steps to liberalise their telecom markets.1

These changes can be seen as dramatically shifting the balance of telecom activity from the phase of policy development and basic institutional restructuring in preparation for liberalisation, to the implementation of the liberalising policies. This makes it a good time to assess the progress that has been made to date, both with respect to policy development and institutional restructuring, and the effectiveness of the liberalisation initiatives so far. An assessment may be helpful for determining prospects and priorities for effective implementation of the next steps in the telecom reform processes. This paper examines the experience at three levels: (1) the telecom services sector in light of the established objectives of efficiency and universal service; (2) development of the information infrastructure as a foundation for implementing the information society policies that many countries have announced; and (3) preparing to facilitate widespread applications and uses of information as part of the knowledge infrastructure of 21st century economies and societies.

2.0 The Different Reform Problems

The fundamental underlying reason for reform was the inadequate performance of the old institutional arrangements in light of changing economic, social and political

1 For a comprehensive review of developments, see ITU (1998) General Trends in Telecommunication Reform 1998 – World (Vol. 1). circumstances. The old regime of national telecom monopolies operating as an international cartel could not meet the challenges of the changing environment. Dramatic technological improvements and a more central role of telecom in economic growth and development have been common and pervasive causes of the breakdown of the old order. However, the specific problems to be addressed in telecom reforms vary significantly across countries. They can be grouped into three main categories.

2.1 Convergence and the Resolution of Industry Boundary Conflicts

The major US problem arose from an increasing number of challenges to the traditional telecom industry monopoly boundaries presented by new technologies and their potential applications. Many new technological developments came from the equipment manufacturing sector (e.g., radio microwave, satellites, switching and terminal equipment). They need not necessarily have challenged AT&T’s public telecom operator (PTO) monopoly directly. However, the industry practice of vertical integration and privileged supplier relations (e.g., AT&T and Western Electric [now Lucent]) foreclosed most opportunities for sales by other manufacturers to AT&T and GTE, the monopoly PTOs. Thus attempts by outsider manufacturers to break into the dominant segment of the equipment market were associated with attempts to promote new operators in the services market as potential customers. Thus firms such as Motorola and Hughes were major players in seeking to break down the AT&T monopoly. Their primary target was opening up the equipment market.

Similarly, the electronics industry found it was restricted from selling improved telephones and other terminal devices to PTOs and end-users. The computing industry found it was restricted from selling its new digital equipment in the telecom sector. Even more important, its transition from stand-alone data processing to teleprocessing was barred by the PTO monopoly restrictions. AT&T would have had to own all the computers connected to its network, and Western Electric would have had to manufacture them. At the same time, large industry users from the finance, transport and other sectors became aware of major cost savings and significant new service opportunities being denied to them by the monopoly restrictions. Thus, the traditional industry and market boundaries of the old PTO monopolies were being eroded from all sides by what today is called convergence.

Ironically, this technologically-based erosion of the PTO monopoly did not first appear in the countries with the least efficient PTOs, but in a country with one of the most efficient – the US. The challenge came here because the US economy fostered the technological developments and the immediate potential for beneficial applications, and because the US structure of regulated private monopoly permitted the old order to be challenged more easily than it could in other countries. The problem was that AT&T was not as efficient as it could have been and was denying market opportunities to an ever increasing number of firms and industries. AT&T would not and could not take advantage of all the benefits coming out of its neighbouring industries; and it could not satisfy the diversifying demands of users, particularly business users. It couldn’t be all things to all people. Policy change in the US was not the result of a fundamental restructuring of the sector, but rather the gradual removal of specific monopoly restrictions that prevented other firms from participating in the marketplace. The Federal Communications Commission (FCC) found itself at the centre of increasing inter-industry conflict as major players outside the monopoly telecom sector challenged what they saw as arbitrary and artificial restrictions on their market participation. Major FCC decisions between the late 1960s and mid-1970s allowed alternative suppliers to provide an expanding range of equipment and services, including specialised long distance, domestic satellite and computer communication services, as well as both terminal and carrier interconnection.

The policy shift was from unquestioned acceptance of absolute monopoly protection to a policy that re-examined specific monopoly restrictions that had been challenged for their justification in the new environment. For the first time AT&T was asked to justify its monopoly restrictions. Most of the old restrictions were found to be unjustified. They were simply denying potential benefits to the sector and to consumers, and were not in the public interest. This led to the gradual liberalisation of specific telecom markets and sub-markets.

AT&T’s response was to engage in a pervasive policy of anti-competitive activities to block, restrict or slow down potential and real competitors which ultimately provided the justification for its break-up under the US antitrust laws. The US did not adopt a comprehensive liberalisation policy until The Telecommunications Act of 1996. The telecom reform process in the US has been driven entirely by domestic US considerations, and its essential task has been removing artificial barriers to entry in a formerly closed industry.2

2.2 Transforming PTTs to Commercial Efficiency

Technological change and new service opportunities are factors bearing on the telecom reform process everywhere. Canada, which has a similar telecom industry and regulatory structure to the US, has tended to follow US market liberalisation developments about a decade later following similar struggles between the old monopolists and potential new competitors, plus the additional concern about the implications of potential US dominance of the Canadian industry. But in other countries there have been other issues at the centre of the reform process, as their inherited monopolies typically have been government PTTs, not privately owned companies subject to government regulation. In addition, for many countries liberalisation means the entry of major foreign players into an essential public utility industry.

Prior to the recent reform movement, most PTTs had not followed commercial practice or been very concerned about efficiency or customer service. As government administrative bodies they tended to follow political and bureaucratic drummers. Telecom services commonly have been used to fund significant financial contributions to the government treasury and/or the post, and as a sinecure for political refugees or an employer of last resort. They have provided a public service of sorts, but have made no attempt to supply a

2 For a more detailed examination of these issues, see Melody 1986. universal service. There are exceptions, of course, principally the Nordic countries which have always been near the top of international telecom comparisons in efficiency, universal service penetration and new service development. But for most countries, the accumulating technological and economic pressure, coming primarily from outside the country, has helped focus attention on the formidable task of converting politicised and bureaucratised government PTT administrations into efficient, commercial PTOs.3

The principal debate has been whether the restructured PTOs need time to prepare themselves for impending competition, or whether immediate competition is needed to force the PTOs to become commercially efficient as fast as possible. It has been compounded by the fact that universal service, which generally had not been provided by the PTT monopolies, now has been recognised as an important public policy objective. If liberalisation is not adopted early, there may be only very little and very slow reform of the national PTO. If it is, there is fear the universal service objective may not be achieved and a major national resource and employer (the PTO) may be destroyed by powerful foreign competitors. In either case the industry will need to be regulated, thus requiring a restructuring of government’s traditional policymaking role. In the PTT countries telecom reform requires a quite fundamental institutional restructuring. By comparison the US reform has been fairly simple and straightforward.

2.3 Preparing to Build a National Telecom Network

For developing countries the reform problem takes on even more dimensions. The PTTs typically serve only a small fraction of the population and geographical area. They have suffered from severe shortages of resources, both investment capital and skills, and have a long waiting list of customers desiring service. The political and bureaucratic influences on PTT functioning sometimes have led to extreme inefficiency. The task is not only converting the PTT to commercial efficiency, but also creating conditions where a truly national telecom network will be rolled out. Attracting foreign investment capital, the most appropriate technologies for a country’s particular circumstances, and managerial and technical skills are essential. The challenge is to devise a structure for doing this while still maintaining government control over effective policymaking and regulation of the sector so as to ensure policy objectives can be achieved. 4

The problem is compounded by the fact that the governments of many developing countries depend heavily on telecom revenues generated by the PTT, and particularly on hard currency revenues generated from international revenue settlement payments. The potential financial, political and general economic (e.g., employment) effects of the restructuring necessary for effective reform tend to be both relatively much greater and more uncertain than for developed countries. The potential benefits to the developing country are great under optimistic scenarios of reform, but the risks also are great, and failure may be irreversible.

3 The PTT transformations are well-documented in ITU, OECD and EU publications over the last decade. For a comprehensive analysis of UK reforms, see Armstrong et al 1994. 4 See ITU 1998. The ITU Telecommunication Development Bureau (BDT) has documented developing country transformations in its many publications. See also Petrazzini 1995; and Melody 1997 (Ed.), Section F – Special Issues Affecting Developing Countries. Thus, developing countries have tended to move more slowly, and have focused on the broader issue of national network rollout than on the specific matter of allowing foreign competition for the services already provided. The debated question is whether such competition would stimulate rollout of a national network or simply weaken the PTT and extract resources from the country. The answer depends heavily on the particular structure of the institutional reforms that are adopted and the effectiveness of their implementation.

3.0 Key Elements of Reform

There is now widespread recognition that telecom is no longer simply a convenient public service, but an enormously valuable economic resource, and an increasingly important infrastructure for economic growth and development. An expanded role of the market can facilitate not only improved efficiency but also the achievement of public policy objectives as well. However, markets can be highly imperfect and unstable. The challenge is to structure the new institutional environment so as to make maximum use of market forces in programs to achieve efficiency and public policy objectives.

3.1 Institutional Restructuring5

The efficient functioning of markets in any field depends upon an effective institutional supporting structure. It is notable that the massive failures of financial markets in a number of countries in 1998 have led to a demand for a stronger legal foundation and more powerful and sophisticated financial regulatory systems. Similarly, the effectiveness of telecom markets depends upon the establishment of a solid legal foundation and an independent, competent and effective regulatory system.

It is apparent there are three distinct, but related sets of activities that are fundamental to telecom reform – policymaking, supplying services and regulation. The essential conditions required for the establishment of an institutional structure that clearly defines separate and distinct roles for policymaking, regulation and operator management are the following:

 Policy Development is directed toward fundamental issues of long-term societal objectives and directions, not issues of day-to-day implementation and problem- solving. It ensures attention to long run implications of developments in the sector and issues arising from them. To ensure policymakers are informed and capable of addressing the need for policy change when it is required, it is important to have access to a specialised professional policy analysis unit. The policy unit is an expert information and analysis group for government policymakers. It eliminates the need for policymakers to intervene in the detailed affairs of the PTO or the regulator except on matters of compelling policy significance.

5 For an expanded analysis of these issues, see Melody 1997a, Section 1 – The Purpose and Experience of Regulation.  Operations Management must be clearly separated from the government so neither politicians nor government bureaucrats can interfere in day-to-day operational decisions. The management must be accountable to a Board of Directors that is insulated from day-to-day government interference. The Board may have political appointees, but for terms of significant duration and with mandates to act independently in achieving specified economic (e.g. efficiency) and social (e.g. universal service) objectives.

 Regulation must be independent both from the PTO and from day-to-day government influence. The regulator’s task is to implement government policy. It ensures performance accountability by the PTO and other industry players to economic and social policy objectives, resolves disputes between competitors and between consumers and operators, monitors changing industry conditions, and advises government on developments bearing on policy. The regulatory agency acts as a buffer between telecom operators and government, helping to ensure the separation of functions. Whereas the PTO and other operators, once separated from direct government influence, may focus too narrowly on financial objectives, the regulatory agency can insure recognition of social and other policy objectives as well.

Figure 1 illustrates the essential relations among policymaking, regulation and operations management. The PTO is separated from government by an independent board of directors, and an independent regulator. The PTO is accountable to its board, the regulator and the marketplace to satisfy specified economic and social objectives.

The effectiveness by which this fundamental separation of basic functions is achieved will have a significant impact upon the growth of the sector. The more effective the separation, the better will be the climate to attract financing and undertake investment. If each function can be performed well, each will provide clarity and stability in an institutional framework conducive to rapid growth and effective achievement of economic and social objectives. This requires both that independence of the different activities be established, and that it be sufficiently transparent to be understood by all the directly affected parties and the public.

3.2 Commercial Independence of the PTO

Reform of the PTO involves its establishment as a commercial enterprise independent of day-to-day influence from political or bureaucratic government interests, but not independent from government policy. Accountability on financial terms is a major step toward eliminating inefficiency, providing a basis for attracting investment capital and extending services to include all profitable market segments. Most PTTs had not extended service anywhere near to the limits of profitability when operating as government administrations. For example, after British Telecom (BT) was placed on a commercial footing, it rapidly extended its universal service coverage from about 60% to more than 85% of UK households because it was profitable to do so. Privatisation of the PTO is one important method of establishing a commercial foundation independent of government interference. But it is not the only method. Government owned commercial firms (called crown corporations in some countries) exist in many industries and many countries, including the US. Whether privatisation is the best method for any country depends on the objectives of its reform policy and the particular circumstances in each country. The UK concluded that privatisation of BT was necessary to break the pervasive political, bureaucratic and trade union control of the PTT and to attract large amounts of capital needed to modernise and expand its network.

For some countries, and particularly most developing countries, some form of privatisation is essential to obtain the necessary large amounts of capital needed for network modernisation and expansion, as well as management and technical skills. However, Norway, for example, concluded its PTT is efficient by international standards, capable of meeting all its investment capital needs, and providing a universal service. For all practical purposes, it has been on a solid commercial footing for some time. The government considers its ownership a good commercial investment offering good returns for the future. The key issue is not the ownership, but commercial independence and access to capital and skills.

As a step in the telecom reform process, privatisation can be misused and fail to achieve its objectives. A number of governments have taken such a large share of the proceeds of privatisation into the government treasury that the privatised PTO is constrained from raising sufficient capital for needed investment on reasonable terms. Some countries have sold off this valuable public resource at too low a price, providing a windfall gain for domestic or foreign buyers. In some countries the PTO monopoly has been privatised before effective regulation has been established, demonstrating that the market behaviour of private monopolies is not much different than the old PTT monopolies.

As a result, the history of telecom privatisation has been a mixed bag of successes, partial successes, failures and regrets. There is no guarantee privatisation will facilitate the objectives of efficiency and universal service. It must be implemented with appropriate checks and balances as part of a larger package of reforms. It can be an important element in a programme of reform. But it cannot be the only element, and its ultimate success in meeting public policy objectives will depend heavily on the effectiveness of the other elements in the programme (See Pisciotta 1997; Melody 1997b).

3.3 Unbundling Telecom Market Sectors

Perhaps the most important steps in a telecom market liberalisation programme are the unbundling of the major market segments that link to the network facilities infrastructure, i.e., the backward linkage to the equipment market and the forward linkage to the services market. Figure 2 illustrates the telecom sector value chain. As discussed above with respect to US developments, the PTO monopoly of the facilities infrastructure was extended to the equipment market by the monopsony buying power of the PTO. Similarly it was extended forward to the services market that requires access to network infrastructure facilities. If these major sectors are unbundled, then competition in the equipment and services markets can be opened up before one examines the more controversial issue of direct competition to the PTO in the facilities infrastructure sector.

This can be achieved by the adoption of competitive equipment purchasing practices by PTOs and the establishment of interconnection and access to the network facilities infrastructure by independent service providers at reasonable terms. It is these liberalising steps that have brought computing and consumer electronic companies directly into the telecom equipment market, and permitted the competitive development of mobile, internet and other services.

3.4 Network Facilities Competition

Possibilities for competition in the supply of network infrastructure facilities raises more difficult issues as market entry requires access to public rights of way and/or the radio spectrum as well as deeper pockets and patient money. Historically, the demand for entry to supply competitive facilities often has occurred because of PTO monopoly restrictions in the equipment or services markets. For example, the original radio microwave applications to the FCC by MCI were made because of AT&T restrictions on MCI’s use of leased circuits, and its refusal to allow independent radio equipment manufacturers to compete for AT&T business. If the equipment and services markets are unbundled and liberalised, the demand for new entry into the network facilities market will be limited to these circumstances where direct efficiency gains are expected. Obviously, if alternative network facility infrastructures such as cable television are developed, ownership should not be bundled with the PTO.

Facilities competition can be of two quite different types. One is the direct duplication of facilities within existing networks to compete for growing volumes of traffic. The other is the extension of the existing facilities network to geographical areas not covered by the existing network. Traditionally PTOs have considered both kinds of competition as a threat to their monopoly. In economic terms the former is direct competition which may or may not be justified by market conditions and public service considerations. The latter is not direct competition, but is simply market extension. It often can provide a basis for competitive benchmark comparisons with PTOs, and can be a stimulus to competition in the extension of the network to unserved areas. It is likely to be beneficial in virtually all circumstances.

Competition has developed in the supply of transmission facilities on international links and long distance links within many countries. Within local exchanges, facilities competition has been very slow to develop outside central business districts in large cities, even considering widespread cable networks in some countries. Only a very tiny proportion of residential and small business subscribers have a choice of suppliers for their local services, even in the US and UK. Moreover local originating and terminating facilities represent the majority of costs for nearly all services. They provide the foundation for virtually all network services development, and the more long distance transmission costs are reduced, the more important the local facilities network and its costs become. 3.5 Independent Regulation

In the early stages of telecom reform, the role and significance of regulation has been somewhat ambiguous. One school of thought was that the PTOs should be privatised, the doors of competition opened and the industry placed under the anti-monopoly laws. Thus, there would be no need for industry specific regulation at all. New Zealand tried to implement this approach. A second school of thought has argued that regulation is needed only for the short-term to manage the transition from monopoly to competition. Regulation should be light-handed and have a sunset provision for expiration after a few years. This was the predominant view in the UK during the early years of reform (but not now), Australia, the World Bank and others. A third school of thought has perceived regulation as a necessary permanent part of the reformed institutional structure, arguing that the reform objectives of efficient competition and universal service can not be achieved and maintained without strong, independent regulation.

As experience has unfolded, there is ever wider acceptance that industry specific regulation must be a permanent part of the new arrangements at least for as far into the future as can be seen at the moment. New Zealand has ended up with time-consuming, expensive, unproductive “judicial” regulation as the courts have been forced to attempt to resolve disputes, with relatively little competition developing. Australia has placed responsibility for all matters relating to telecom competition under the competition authority, to discover it has unnecessarily restricted its capability to act before the fact on important issues, and is now limited to acting against violations after the fact. After experience with light-handed transitional regulation, the UK, World Bank and others have shifted their positions to strong, continuing regulation. The US Telecommunications Act of 1996 directing open competition for all US telecom markets requires more, not less detailed regulation at both federal and state levels.

A close examination of the essential characteristics of the network facilities infrastructure sector makes it immediately apparent that these markets will remain highly imperfect for the foreseeable future. Regulation is necessary to provide a foundation upon which markets can function more effectively than they could otherwise. Access to public resources, including the radio spectrum, numbering and rights of way, is essential for facilities-based entry. None of these essential resources can be acquired in unregulated competitive markets. Operators must be licensed. There must be a high degree of cooperation in technical standards development. Interconnection with dominant PTOs on reasonable terms, is essential and will occur only if regulation enforces it. Consumers of basic public services who have no competitive options will need regulatory protection for both prices and quality of service. Universal service regulation will be necessary both to capture the network externality benefits that competitive markets cannot achieve and to implement important economic and social policy objectives. With network service developments on the internet and electronic commerce coming over the horizon, new concerns relating to privacy and security are requiring policy and regulator attention. There is one overriding reason why independent regulation is particularly important to achieving the competition goals of telecom reform. It is absolutely essential that the “competition” among the major industry players be moved from the arena of politics and bureaucracy to the marketplace, and to achieving the industry performance objectives of government policy. This will only happen if regulatory decisions are made on their substantive merits, not on the basis of political favouritism or the backdoor influence of the most powerful industry players. Only an independent, transparent regulatory process, that is seen to be so by all affected parties and the public, can achieve this.

The case for continuing regulation is based upon the failure of unregulated markets; but that does not guarantee regulation will succeed. Regulation can fail as well as markets, and instances of regulatory failure are not difficult to find. The reform challenge is to establish regulation that can implement the new policies effectively for the foreseeable future. This is not an easy task and requires careful attention to the design, structure and operation of the regulations and the regulatory agency. In a very real sense telecom regulators will be the market managers for the future development of the information infrastructure of the next century. Under progressive management by informed professional regulators, there can be enormous public and private benefits, far exceeding what could be hoped for under either government monopoly or unregulated markets.6

The independent regulator must be subject to standards of accountability to the government, the industry and the public. The regulator normally reports annually on the extent to which the industry is achieving the policy objectives established by government, the results of the regulator’s monitoring of industry developments, and measures of the regulator’s own performance of regulatory activities. In addition, procedures for administrative due process, public justification of decisions, appeals to the court and public access to information, all help ensure the accountability of the independent regulator.

4.0 Progress and Prospects

4.1 Institutional Restructuring

The unbundling of policy, operations management and regulation functions from centralised government control has been a partial success. Implementation typically has not been determined by a single restructuring exercise, but by incremental steps in the direction of the structure illustrated in Figure 1. Each step has provided experience, learning and the surfacing of unresolved issues or problems, which then have been resolved by taking another step toward greater independence for the PTO and/or the regulator. In some countries additional rounds of legislation have been necessary.

Government control of PTO management has been withdrawn by a series of steps, including gradually reducing government’s position on the Board of Directions and its ownership share. As government has given up its direct influence over PTO management,

6 For further discussion of the essential considerations for framing national telecom reforms see Melody 1997a, chapter 2. it has recognised that stronger regulation is needed. Thus, we have seen a gradual rollout of regulatory power and independence, with different countries starting at different dates and rolling out at different speeds. A few countries (e.g., the UK) have moved quite a way down the path. Most countries are still in an early phase. Many countries are just starting.

This gradual rollout of independence has sometimes created confusion about what the governments objectives of telecom reform really are. As majority owner, some governments have lost sight of the objectives of promoting efficient and universal service development and focused only on maximising their financial position, either in terms of very high dividend payments or sale of their shares upon privatisation. This has led them to prefer weak regulation, restricted competition and monopoly profits. A similar financial myopia has led to the design of auctions of licenses and radio frequencies in some countries that has fostered such high payments to the government that funding for service development investment was restricted and competition deferred and weakened. The result of such activity has been to slow down the telecom reform process and make its effective implementation more difficult.

This gradual rollout process has also made the role of the regulator much more difficult than it need have been. With a narrow legal remit and minimum powers, few staff, little experience, a small budget, and a government belief in light-handed regulation, it has been extremely difficult for regulation to be very effective. Only after problems have arisen has regulation been strengthened.

Developing countries have tended to move more cautiously both in establishing and implementing their telecom reforms. Their primary concern has been national network rollout, not foreign competition for existing services. They need foreign capital, expertise and hard currency while coping with major labour adjustment and skill development issues. Moreover policy and regulation must address these issues within a framework that facilitates the transfer of technology and skills, often in an uncertain political environment. This requires that developing countries establish more sophisticated regulation implementing a broader set of objectives. With a more difficult agenda under more difficult circumstances, most developing countries are in the early stages of their reform programmes.

In summary, the fundamental institutional restructuring necessary to implement telecom reforms has developed much more slowly than most analysts expected. In most countries, institutional restructuring has not been established to lead the reform process. Rather governments have been driven by external events such as EU directives in Europe or World Bank directives for developing country loans, as well as the rapidly changing global industry developments. There have been many false starts and diversions. But countries are learning from their own early experience, as well as from others. Cross- country comparative indicators now are being accepted and used as indications of good practice and productive performance. Perhaps now the pace of institutional restructuring will increase and provide a firm and clear foundation for implementing the essential reforms. 4.2 Transforming the PTO

The transformation of PTT administrations into independent, commercial, efficient PTO competitors also has been at a much slower pace than one would have expected. It is explained primarily by: a) the gradual disengagement process that most governments have followed and the ambivalence and uncertainty surrounding it; b) the difficulty of converting organisations with a long history of bureaucratic administrative culture into ones with a strong commercial market culture, which can have dramatic consequences for employment and skill requirements; and c) the uncertainties of industry development in the face of technological convergence, changing consumer demands, and new forms of competition arising from the breakdown of traditional industry and market boundaries.

In many countries the transformation process has raised the issue of the role of the PTO in foreign countries as well as the domestic market. Should the national PTO be viewed as a national champion and protected in the home market so it can compete more effectively in foreign markets? Many PTOs think so. Obviously if all countries were to follow such a policy, there would be little change in industry structure. However in such a dynamic, increasingly international sector, such a policy is likely to fail rapidly. If national PTOs are to be effective competing in international markets, they will have to become efficient in their home markets as rapidly as possible. They are not likely to become so until they are brought to attention by some serious competition. Concern about the PTO as national champion has slowed many PTO transformations.

Many PTOs have responded to the gradual erosion of industry and market boundaries by seeking mergers, strategic alliances and joint ventures with firms in the computing, electronics and media sectors to position themselves for the future.7 Most of these have been unconsidered reactions to the new market uncertainties or attempts to pre-empt competition. Few have provided significant benefits. Most have failed to live up to expectations. Many have failed absolutely and have had to be disbanded. AT&T leads the pack on failed alliances, but several newer PTOs seem determined to follow in its footsteps. However, the significant resources wasted in the failed initiatives have prompted many PTOs to look more closely at their core competencies as a basis for building competitive advantage in future markets. This more considered approach will facilitate completion of their transformation to efficient, competitive commercial enterprises.

4.3 Creating Effective Regulation

Regulatory agencies have also gone through a process of shaping by trial and error, generally gaining more responsibilities, power, resources and independence as experience with the new arrangements has been gained, although there are significant differences among countries. Most countries will need to establish greater regulatory independence to

7 The EC reports that in 1996, more than 15% of the total value of world-wide mergers and acquisitions (US $1 trillion) was generated by the information and communication industries. See European Commission 1997, p.6. convince investors, competitors and consumers that the regulators are at arm’s length from political influence and PTO monopoly power on specific issues of sector regulation. But the trend is in the right direction.

A more serious concern is the compatibility of regulation across jurisdictions, and the nature of reciprocal relations among state regulatory agencies. Significant regulatory incompatibilities create artificial barriers to efficiency and market development, and a failure to pursue reciprocity wherever possible imposes costly delays on those needing regulatory certification or approvals. This can be difficult as different countries have different traditions, sometimes see different roles for regulation in their different circumstances, and often are at different stages in the reform process. The new national regulators in the EU countries now meet periodically to discuss these and other common issues8. Nevertheless it seems just a matter of time before an EU regulator is established. This will foster a needed debate over which responsibilities can be best performed at the EU and state levels. We can expect similar developments in other regions of the world.

At the same time, as Pekka Tarjanne points out,9 there is an urgent need to assess the specific requirements for global governance in the 21st century. This is not direct regulation in the manner discussed above, but rather updating the roles of international agencies like the ITU, WTO, WIPO and others in facilitating the achievement of common telecom policy objectives. Global issues requiring international resolution will become increasingly important. A structure must be designed to meet the needs for efficient, expeditious and responsive global governance.

In the initial stages of reform, the accountability of the regulator has been primarily to the government and secondarily to the courts. Accountability to the industry and the public has been less clear. The establishment of public procedures permitting participation by all interested parties, public access to information, and public justification of decisions in a transparent process has been slower in coming. Some movement in this direction can be expected as greater regulatory independence is obtained. However, it is an open question whether public participation and accountability will be achieved. There is a serious risk that in many countries regulation will become a mediator among contending industry interests in a process that makes public participation extremely difficult and relegates public interest objectives into lower order issues.

Regulators are in the process of establishing substantive standards and decision criteria that will be used in reaching judgements on the main issues they must address. One of the most important issues is how regulators will act to ensure the dominant PTO does not use its monopoly services to cross-subsidise its competitive services, or otherwise use its monopoly power to prevent or harm competition. The regulatory choices of barring a PTO from providing specific services, requiring it to use separate subsidiary companies or adopt line of business restrictions, or engaging in detailed cost of service regulation all have been tried and each has particular strengths and limitations. The resolution of this

8 Some regulators are becoming proactive in taking steps to examine current trends and developing issues. See, e.g.., Telestyrelsen 1998. 9 See article in this volume and Tarjanne 1997. issue will have a major impact on the behaviour of the PTO, the nature of the competition that develops and the direction of the industry. But to be effective there must be a high degree of consistent treatment among national regulators in a region.

Similarly a relatively consistent regulatory approach across neighbouring countries to network unbundling and the determination of interconnection charges and conditions will be necessary to promote efficient competition. In this respect, cross-country comparisons may be more relevant for many countries than detailed implementation of one of the infinite variety of methods for calculating long run incremental cost (LRIC). Both LRIC and the most popular standard for judging the reasonableness of basic service prices, RPI – X, are sufficiently pliable in application that they can be bent either to serve the full employment needs of consultants or the common sense judgements of competent, informed regulatory staff. The same can be said for calculating the universal service cross-subsidy cost, and the standards for judging progress toward the enhancement of universal service coverage. The effectiveness of regulation will depend significantly on the capability of regulatory staff to develop and apply simple, operational standards in a consistent and timely manner.

The US experience with telecom regulation provides a reference point that is strong in principle, but more often than not ineffective in practice. The independence of the FCC and state regulators is enshrined in the telecom and administrative due process laws. Transparency, accountability and participation are provided in a theoretically sound institutional structure. However, implementation of these principles of participation and accountability has led to a legal formalisation of the process, increasingly detailed evidentiary and accountability requirements, and the development of large legal and consulting constituencies that feed off the process. The result is a time consuming, costly and cumbersome process that has grown out of control and may be almost impossible to change.

The landmark decisions in US telecom policy are made by the Supreme Court, years after issues are raised. The US Telecommunications Act of 1996 has been dubbed the telecom lawyers and consultants full employment act. Two years after passage, it is bogged down in judicial appeals and a mass of regulatory hearings. The system is choking on the exploitation of its due process principles. The challenge for all countries and regions is to design an implementation regime that provides for participation and due process, and the application of relevant and consistent substantive decision-making criteria, within a framework of timely and expeditious regulatory decisions.

4.4 Sector Performance

The ultimate test of the success of telecom reform is the sector’s performance. There are four main areas to look for demonstrable progress, 1) unbundling of markets to permit access and new service development; 2) the actual development of competition; 3) reduced prices and improved service; 4) an expansion of universal service penetration. 4.4.1 Unbundling

Steps to unbundle PTO monopsony power in the equipment market and monopoly power in the VAS market generally have been significant, as is evident by the dynamic competition and very high rate of productivity improvement in both sectors. The internet revolution and the anticipated electronic commerce explosion in the next few years will help to ensure that this unbundling of major sectors provides widespread access opportunities. Interconnection to PTO networks has opened opportunities for VAS and long distance services, with debates centering not so much on access, but on the price of access. Services markets have been opened to competition, but interconnection will be a source of contentious debate for some time as interconnect charges are by far the largest cost element to most competitive service operators and an important revenue source for PTOs. Small changes in interconnect prices and conditions significantly affect the competitive position of new entrants.

In contrast, there has been little unbundling of the local exchange and attempts to do so have run into serious difficulty. In many countries the PTO owns the infrastructure for cable television. Some regulators do not have the authority to require unbundling. In many markets there is no financial incentive for competitors to enter. As this represents the final step in the unbundling of network services from facilities, the manner in which it is ultimately accomplished will be extremely important for industry development. This will be a key issue in the next phase of reform in countries leading the reform process.

4.4.2 Competition

Evidence of significant competition can be found in many countries in VAS, mobile and international services. It has been more limited for domestic long distance and rare for local services. IP telephony will stimulate further competition. Cable, fibre rings in business districts of large cities and DCS 1800 networks provide fringe competition for a few customers, mostly large corporations.

However experience in the US, the UK and other countries points to a high probability the industry will be characterised by strong or “tight” oligopoly at the centre with effective competition limited to market fringes, niches and related submarkets. Even in the US long distance market, after a period of price competition in the 1980s, the 1990s have been characterised by increasing prices despite decreasing costs. In 1992 the FCC stopped mandating that AT&T flow through reductions in its local access charges to consumer prices. Since then AT&T, MCI and Sprint have raised prices in unison several times, despite significant reductions in the local access charges they must pay (Trebing 1997). Tight oligopolists tend to avoid price competition while seeking to use heavy marketing expenses to build customer loyalty, provide barriers to efficient small competitors and control industry development. The result is an inefficient allocation of economic resources and major barriers to innovation.

Recent estimates for local market competition show a 98% monopoly in the US and 89% in the UK. Given the persistence of monopoly control over final customer access, strong oligopoly in major service areas, and traditional PTO dominance of the major competitor positions in one another’s markets, it would appear that the role of competition may be far more limited than most analysts expected. A primary task of regulators will be to keep the access doors to these markets open as the oligopolists try to close them.

4.4.3 Prices

Overall price trends have been steadily and significantly down, but residential connection and local usage charges in many countries have been up, often reflecting a “rebalancing” of costs whereby the common costs of the local exchange are allocated to subscribers for the privilege of connecting to the network. This reflects a time honoured but economically indefensible principle of PTOs to allocate the common costs shared by all services to monopoly services and away from competitive services.

The price reductions in some services have been dramatic, e.g., mobile, international telephony and some VAS, and clearly have been stimulated by competition. However when one looks at overall price trends, they are less significant in reference to other standards of comparison. The unit cost reductions in the equipment purchased by PTOs have been many times greater than PTO price reductions. Price reductions in internet and other VAS services, including IP telephony, arise because new technologies permit network capacity to be used with greater efficiency by service suppliers.

By some analyses, there is little evidence that PTOs themselves are becoming significantly more efficient. They are simply benefiting from the very high productivity of their suppliers and their customers. One study of BT cost and price trends concludes that BT’s rate of productivity improvement is no greater after privatisation than it was before (Harper 1997). Clearly the causes of productivity improvements and the rate and distribution of price reductions must be a topic for ongoing scrutiny by regulators and researchers.

4.4.4 Universal Service

In many countries the transformation of national PTTs to commercial PTOs has significantly extended universal service coverage because it was profitable to do so. In many others this market extension to the limits of profitability still has a long way to go. But commercial criteria generally are not sufficient to make basic service truly universal, and policy makers are already recognising that basic telephone service will not be sufficient to participate in 21st century information societies.

Many PTOs have discovered universal service as a useful point of leverage to argue for restricted competition because of the cross-subsidy necessary to achieve universal service, or for all competitors to share in covering the universal service subsidy. However, experience has shown that in most developed countries the subsidy is an extremely small portion of PTO revenues. Independent studies have shown that the universal service subsidy in the UK is about 1% of BT’s domestic turnover, and in Australia about 2% of total revenue. In the national replies of EU countries to the 1997 Commission questionnaire asking for cost estimates of universal service obligations, only 4 of 15 countries supplied estimates. The highest figures were 5.5% of turnover by Spain and The Netherlands. Experience has shown that once PTO estimates are subjected to independent scrutiny, they are reduced to a fraction of the initial claim (Melody 1998).

It is important to weigh any extra cost associated with universal service provisions against the extra benefits realised by being the dominant PTO, with connections to almost every customer and the significant economies of scale and scope associated with operating a national network. There is little doubt that these benefits vastly outweigh a few percentage points of additional cost in comparison to competitors. Moreover, as all competitors who wish to provide public services will require interconnection with the PTO, if PTO network costs are the basis of the interconnection charges, as happens in virtually all countries, then competitors will be contributing to coverage of the PTO universal service costs through their interconnection charges. Elaborate mechanisms for calculating and sharing extra universal service costs are primarily to blunt the face of serious competition. Those countries that are serious about universal service, e.g. the Nordic countries, have gone about it in the simplest way possible. Denmark and Finland haven’t even bothered to calculate it (European Commission 1996).

Nevertheless only a relatively few countries can claim to be providing a truly universal service and industry developments may make it difficult to achieve for many countries. As the network is upgraded for new VAS and international services, most of the upgrading costs are common costs in the local exchange. As competition develops for these services, cost “rebalancing” shifts these common costs to the connection charges that all consumers must pay. Thus, while network usage charges fall, connection charges rise. The cheaper it is to use the network, the more expensive it is to connect to the network. This will make it more difficult for those at the margins of the universal service envelope to connect to the network and raises the possibility that in some cases when they do connect they may be subsidising others. The Dutch regulator OPTA recently ordered the PTO (KPN) to reduce its connection charges for basic service by 25% to bring them into line with connection costs. This issue will require more detailed examination by regulators.

A similar trend of cost “rebalancing” is occurring with respect to international services, with significant implications for developing countries. Although some developing countries are making significant progress in the long process of rolling out a national network, many are not. As competition forces countries to shift network common costs away from international services and back on to national services and users, developing countries lose significant hard currency contributions from international revenue settlements to help fund their national network rollout. This makes the development of a truly universal service more difficult and magnifies the gap between rich and poor countries. Resolving this issue in the interest of promoting a global universal service is the collective responsibility of policymakers and regulators in all countries. Yet, to date little progress has been made in discussions at ITU and other international fora.10

10 For an analysis challenging the conventional wisdom, see Thuswaldner 1998. 4.5 Priorities

This overview of progress and prospects in telecom reform highlights some key issues for priority attention if telecom reform programs are to be capable of full implementation:  a speed up in the remaining steps to complete full institutional restructuring;  additional steps to establish strong, independent national regulators;  study and planning for the future establishment of regional regulation and the most appropriate division of functions between national and regional regulators;  assessing the most appropriate and effective roles for national, regional and international governance of the 21st century global telecom system, and how this new governance structure can facilitate and promote the more rapid extension of the system toward a global universal service.  establishment of national regulatory procedures, standards and decision criteria that facilitate informed participation and expedition, and that provide clear indicators of performances for both industry and the regulator;  ongoing examination of the state of competition in telecom sector markets and submarkets, including possibilities for further unbundling, the significance of specific barriers to entry, and the implications of tight oligopoly for efficiency, pricing and innovation;  ongoing examination of the costs of basic service and different forms of connection to the network, and their implications for achieving a true universal service;

5.0 Telecom Reform and Information Society Policies

Telecom reform is not only about efficient telecom services. It is also about establishing a foundation for the information infrastructure of future information societies. Throughout the 1990s, it has become fashionable for national governments, international organisations, industry groups, corporations and other organisations to publish visionary policy statements or reports on the future “Information Society”. These are illustrated by documents from national governments – such as the very early IT 2000-Singapore Unlimited, the US, The Global Information Infrastructure: Agenda for Cooperation, Denmark’s Info-Society 2000 and Information Society Ireland: Strategy for Action – and from international bodies such as the European Commission’s Bangemann Report and its successor documents and the Conclusions of G-7 Summit “Information Society Conference”11 Enhanced telecom networks will provide the information superhighways

11 See, for examples: National Computer Board 1992, “A Vision of an Intelligent Island: the IT 2000 Report”; NTIA 1993, The National Information Infrastructure: Agenda for Action; European Commission 1994, Europe and the Global Information Society: Recommendations to The European Council (also referred to as the Bangemann Report); European Commission 1994, Europe’s Way to the Information Society: An Action Plan, 1994; Industry Canada 1994, The Canadian Information Highway; Brown, et al. 1995, Global Information Infrastructure: Agenda for Co-operation; G-7 1995, “Conclusions of the G-7 Summit” Information Society Conference; Ministry of Research 1995, Info-Society 2000 (Denmark); and Information Society Ireland 1996, Strategy for Action. Report of Ireland’s Information Society Steering Committee. for 21st century information economies and societies. What is expected from the telecom sector and its regulators?

5.1 Convergence and Information Economy Development

Certain broad economic trends that will characterise 21st century information economics are evident. First, the geographic limits of markets in many industries are being extended from local to national, from national to regional (e.g., European), and from regional to global. This extension of markets is being driven by applications of new information and communication technologies and services (ICTS) in different sectors of the economy, not the least of which is the ICTS sector itself. Second, the primary driver of economic growth in both national output and employment is the services sectors, as opposed to industrial production or agriculture. Services sector growth is founded on increasing use of new ICTS as key input resources, and new opportunities arising from ICTS convergence. This in turn is prompting a shift in resource priorities from physical capital to human capital, i.e., development of the skills that enable production and applications (especially software), as well as consumption. Thus, the key factor of production in the transformation from an industrial to an information economy is effective sectoral applications of ICTS throughout the economy, and particularly in the services sectors.

The electronics, computer, telecommunication and information content industries constitute a US $2 trillion global industry sector. It is the fastest growing sector of the global economy and already represents 20% of world trade. Most national and regional governments are counting on these industries to provide the primary stimulus to their future economic growth. A breakdown of global revenues in the sector by industry is shown in figure 3.12

The ICTS sector is typically described as resulting from the convergence of all the industries. However, in this sense convergence has only a very limited abstract meaning. To understand how convergence processes are actually developing, and their implications, one must look more closely at precisely what is converging, how, where and with what effects. One must identify and examine the multiple dimensions of convergence. The primary processes are illustrated in Figure 4. Some of the main characteristics of convergence are the following: a) convergence should not be seen only as a single dimension technological issue. It applies to changes in the industries, markets, policies and regulations as well. There are significant differences amongst them and other dimensions may be even more important then technology in determining the directions of development; b) within technology, the primary technologies converging are generally classified as telecom, computing and content technologies. But rarely do we see evidence of the full convergence of all three types of technologies. Combinations of partial convergence of two types is more typical, e.g., digital networks and CD ROMs. Each has very different implications for network and services development. Competition among alternative

12 As reported in the European Commission 1997, p.10. possible directions of convergence is more likely to be the trend in future years, with a particular focus on the extent of control of so-called “intelligent” networks that will reside with the network facility operators, independent protocol platform managers, ISPs and customers through the PC itself; c) industry and market convergence may play a more influential role than technology in determining the dominant convergence trends. But it is not simply a matter of mergers, strategic alliances and joint ventures. The problem of identifying good partners for specific types of convergence is difficult and requires an understanding of latent market and demand characteristics, as well as industry and organisational cultures. The key is demand driven, not supply driven convergence. d) policy and regulatory convergence will set the framework for both industry and technological convergence. Despite the plethora of global information infrastructure and information society policy statements, there has been little follow through yet by most governments. The real policy and regulation being developed is industry specific e.g. telecom, the focus of this paper. It is unclear at this stage what shape a set of convergence policies might take. However it is clear they must build upon and be consistent with telecom policy and regulation. In turn, telecom policy and regulation should be preparing the ground for convergence and the implementation of information society policies.13

5.2 Components of the Information Infrastructure14

The information infrastructure of any country or region has a number of fundamental components. These are illustrated in Figure 5. An enhanced “broadband” telecommunication facility system with advanced interactive capabilities has been labelled the “information superhighway”. The equipment sector (hardware and software) is the primary driving force behind most of the new technological developments that are opening new opportunities for both industry and individual users. An information content sector and new value added communication services are equally important in the development and application of new services.

In addition, special skills are needed both to produce and to apply and use the new services. Finally, comprehensively co-ordinated national and international policies by government and industry are essential to guide the evolution toward information societies that reflect the circumstances, priorities and values of particular societies, within a framework of international co-operation and compatibility.

The foundation of the information infrastructure is the telecom system. In a sense, referring to an enhanced telecom system as an information superhighway is a most inappropriate metaphor. This particular enhancement is not really about moving great quantities of information from one point to another. It is primarily about new forms of electronic communication that open up opportunities for interactive communication and information exchange that previously have not been possible.

13 Some of these issues are addressed in Ypsilanti and Xavier 1998. 14 For a more detailed examination of these issues, see Melody 1996. However, effective access, use and benefit from the information superhighway will require much more than an expansion of the capacity of transmission facilities. It will require a change in communication behaviour. Issues of need, preparedness, affordability, skill and priorities are fundamental to resource allocation decisions and policy analysis affecting all aspects of the information infrastructure.

Increasingly, electronic communication and information services supplied on the telecom facilities network are being generated by service suppliers outside the traditional telecom sector, and even outside the information technology sector. Figure 5 illustrates this growing separation between the telecom facilities network, which provides the physical capacity to communicate, and the electronic services that use the facilities network. The growth of electronic services as a distinct component of the information infrastructure has provided an avenue for the design of new services that are more responsive to the specific needs and demands of particular users. It reflects a shift away from the almost total supply-side orientation of service development that has characterised the traditional approach of telecom operators toward a more demand-side orientation that pays more attention to specific customer needs. These service providers typically acquire more detailed knowledge of specific customer needs, which then represents the basis of the “value-added” they provide. They have also stimulated the telecom operators to offer their own value-added services and improve their responsiveness to customer needs.

The policy and regulatory implications of these developments are extremely significant. As the internet becomes a stepping stone for IP telephony and electronic commerce, privacy, security, intellectual property, access and use of information, electronic contracts and signatures and traditional consumer rights must be examined in terms of this new form of communication, information exchange and trade. Conflicts between US and EU regulations on data protection already have raised serious issues. The World Intellectual Property Organisation (WIPO) is trying to develop a coherent set of regulations that will be accepted internationally. As data mining by marketing organisations becomes more intensive, further regulatory conflicts are inevitable (See Henten and Skouby 1998).

The existence of viable, internationally competitive information technology and telecom equipment manufacturing industries in a country is extremely important because of its economic implications for information infrastructure growth. Expansion can either provide a stimulus to growth in these supplier industries, or create a major trade deficit for countries where the technology must be imported. For this reason, many countries (e.g. Japan, Singapore, Ireland, Australia and others) have established industrial policies directed to encouraging the growth of these industries in their home markets. In some countries, the purchasing policies of the national PTOs are being used to promote equipment manufacturing and software development capability in the domestic market simultaneously with expansion of the telecom infrastructure.

Clearly information society policies bring into the picture a range of additional policy and regulatory issues. The unanswered question of the moment is whether they can be best addressed as part of a single telecom regulatory agency or by separate regulatory agencies. In an era of convergence the issue of regulatory convergence must be examined. There is a serious risk that multiple regulatory agencies could yield suboptimal, uncoordinated and potentially inconsistent decisions.15

6.0 Building Knowledge Infrastructures

6.1 ICTS and Productive Applications

It is doubtful that this very expensive and comprehensive upgrading of the entire electronic information infrastructure could be justified simply in terms of the supply of a range of new services to business and household users. Although entertainment services in the form of expanded options for viewing television, electronic gambling and playing interactive games at home are expected to provide significant markets, the major benefits of the electronic information infrastructure are expected to arise as a result of widespread applications of new services throughout the economy and society to make firms, government agencies and people more productive. Thus information must not only be accessible, there must be the competence and skill to interpret and apply it productively.

These applications are expected to transform the traditional ways of operating large and small businesses, government agencies, education and health organisations and other institutions. It is anticipated that applications of the new electronic services will permit a major restructuring of all organisations so they can provide more efficient and responsive services. The anticipated benefits will arise from the integration of the new information/ communication services into the operations of each major sector of the economy, and of society. This is illustrated at the top of Figure 5.

The beginning of such changes has been seen in the global restructuring of banking and finance, in major changes in travel and tourism, in the early applications of electronic funds transfer, just-in-time management systems, and electronic document interchange in a variety of different industries and types of organisations. It has facilitated the transformation of the music and media industries to global dimensions. Electronic commerce is expected to grow at exponential rates over the next few years.

Clearly a successful transformation of any major sector of society will have to take place over a considerable period of time. The field of education and training is a good example. The increasing requirements for “learning” in the 21st century will mean that distance education and computer assisted learning must be moved from the fringes of national learning systems, where they are now, to the centre. Societies will have to move the education and training system on to the electronic information infrastructure. But to date, there has been little co-ordination, let alone convergence of policy development and planning in telecommunication and in the education/training sectors in any country.

For the future, governments will need to focus on the most efficient and effective use of a variety of new communication and information services, and new forms of content. This

15 The UK Institute for Public Policy Research (IPPR) has reported that media and communications in the UK are now regulated by at least eleven separate agencies (Collins 1996). will permit more and more diversified opportunities for access to learning by people of all ages and circumstances. This will permit more effective use of existing educational resources. The role of teachers in this new environment is expected to shift from being suppliers of information (filling empty vessels) to more highly valued facilitators of access to information and learning (guiding and collaborating). The application of the full range of new electronic information and communication services is expected to permit the redesign and transformation of the education/training/learning system in developed countries and to open new opportunities for developing countries. Clearly this is a tall order and will require major reallocations of resources both within the education/training sector, and between this and other sectors before it can be achieved. The transformation will not be an easy one and its success will depend on the ability of people and organisations to draw knowledge out of the opportunities made possible by the new information infrastructure.

Figure 5 illustrates just some of the major areas of application of information infrastructure services. The transformation process will proceed at a different pace in each sector depending upon the circumstances in that sector both nationally and internationally. It will proceed at a different pace in the same sector in different countries. Each country will need to establish its own priorities based on its own circumstances. In certain areas, some countries will find benefit in leading the transformation process. In others, they will wish to follow and benefit from the experience of others. Establishing national priorities with respect to applications of the information infrastructure will be extremely important for developing the knowledge necessary to improve productivity and fulfill national policy objectives.

6.2 Knowledge Indicators

Although it has often not been recognised, knowledge always has been central to economic and social development. Its embodiment in human beings and in technology has permitted improved productivity and economic growth. New information/communication technologies, services and networks are opening a whole new range of possibilities for generating and distributing not only information, but also its interpretation and application for economic productivity and human development. The OECD has estimated that more than 50% of the Gross Domestic Product (GDP) in major OECD economies is knowledge-based (OECD 1996).

As a means of promoting the generation and productive application of new knowledge some countries are attempting to develop “national innovation systems” and technology infrastructure policies and there are discussions about what makes up “national learning systems” (see David and Foray 1996). The World Bank 1998/99 World Development Report is entitled “Knowledge for Development” and focuses on how closing knowledge gaps can improve the lives of the poor and the economies of developing countries. It argues this can happen by exploiting the potential of the new global information infrastructure. However, if 70% of the world’s population is not connected to, or participating in the new networks, then the possibilities for diffusing knowledge will be severely constrained. Clearly telecom reform and information infrastructure development are increasingly integrated with the more encompassing knowledge infrastructure and its role in generating economic growth and facilitating human development.

Unfortunately, the economics of knowledge in the knowledge of economics is extremely limited.16 The best quantitative measures calculate the resources invested in knowledge creation and distribution, i.e., the inputs. Measuring outputs is more difficult. But it is known that information/communication networks are fundamental components of any knowledge system, and the more effectively they can be integrated into it, the greater will be the potential for that knowledge system.

One fundamental indicator of the state of development of the knowledge infrastructure of a country in the 21st century is the coverage and the quality of its telecom network, i.e. its universal service penetration. A second is literacy rates. Other indicators might be general or technical education levels and the spread of personal computers in the population. A set of such indicators is necessary to better understand the basic components of a knowledge infrastructure and to identify bottlenecks to development. One set involves eight indicators which were selected “based on data availability and their value in provoking thought about different patterns of development in knowledge societies” (Mansell and Wehn 1998, p. 36). They are main telephone lines and personal computers per capita, electronics production and consumption indexes, television set and internet host indexes, and technical graduates and literacy indicators. This facilitates a mapping of country knowledge infrastructure “footprints” and provides a stimulus for further empirical and theoretical work on these issues. Exploring the role of telecom technologies, networks, services, applications, policies and regulations in the development of knowledge infrastructures is an important new opportunity for industry, government and the research community.

6.3 Proactive Regulation?

Clearly the objectives of reform in telecom go far beyond the telecom sector. The achievement of economic and social policy goals in many sectors of the economy, including education, health and the reform of government administration, rest on successful applications of new ICTS that will be supplied over the telecom system. Should the regulators of the industry sector that provides the very foundation for this transformation of the economy, and of society, play only a very limited role bounded by a narrow industry definition that is rapidly eroding? Should convergence extend to the conception and role of regulation in the converging sectors?

If one examines the leading industry sectors that have made successful applications of new information and communication services to transform their industries, e.g. banking, transport, tourism etc., in no case have they simply purchased available telecom services. In every case there has been a period of experimentation and learning about the industry's special needs, the range of present and possible future service options, and ultimately the development of new networks, e.g. the SWIFT network in banking. The new networks

16 See Boulding 1996, for a seminal paper on the subject. were designed in association with organisational changes, skill development and new specialised service offerings by the telecom operators, all within a framework of increasing market pressure for change in the applications industries.

At the present time, most telecom user industries, and particularly those in the public sector, explain that the telcos do not offer services they need or can afford to apply in a major reform of their respective sectors. In response, the telecom operators observe that the user industries typically do not know what they need or want. In most cases both sides are right. Can an informed, independent, telecom regulator be a catalyst for facilitating the development of the new telecom service networks that will be necessary if beneficial applications of the information infrastructures are to be made in the foreseeable future? Should this be a responsibility of telecom regulators during the transformation to knowledge societies? If so, telecom regulators would view telecom issues in the broader context of information economy/knowledge society development policies. Telecom development indicators and targets would not be limited to telecom sector objectives, e.g. universal service penetration levels, but would extend to applications development in education, health and other areas, e.g. electronic education and health service penetration and participation rates. Regulation would take on an important proactive role to complement its role as industry specific monitor and policeman.

Whether one views a proactive role for telecom regulators as an opportunity or a threat will depend upon one's view about the limits of imperfectly competitive markets in telecom, the ability of institutions – especially public institutions – to reform themselves, and the availability of the knowledge and skills necessary for driving the applications process forward. In the US telecom industry competition is much more advanced than other countries, but highly imperfect. Despite widespread availability of knowledge and skills, public sector institutions in particular are generally resisting change as they do not see benefits outweighing costs, and the proposed applications are viewed almost entirely in terms of supply side technology and capacity, e.g. fibre to the school.

In other countries, the extent of competition is less, the role of the public sector is greater, and the knowledge and skill base is lower. One can expect less from the market, the public sector to be transformed through new information service applications is larger, and fewer knowledge and skill resources must be spread thinner.

Proactive telecom regulation at the national level may be able to play an instrumental role in helping to achieve potential information/knowledge society development objectives. Shaping the precise role of telecom regulation in implementing information/knowledge society development policies is a 21st century task. It deserves research and debate within the context of the knowledge infrastructure of future economies and societies.

7.0 Conclusion

There has been significant progress in telecom reform. However, the most difficult steps of policy implementation remain to be accomplished. Establishing effective and responsive national and regional regulation as part of a new global governance system will be a formidable challenge. In particular, testing the limits of competition in very imperfect telecom markets, and establishing regulations to promote efficiency and universal service will require extremely competent, informed and independent regulators. The seemingly elusive goal of a truly universal service must be given a higher priority everywhere if the increasing gap between the telecom/information/knowledge and income rich and poor is to be seriously addressed.

Telecom reform is leading to the establishment of new information infrastructures. Telecom policy and regulation must now encompass the information society objectives of broader national policies. These new information, communication networks are providing the foundation for new knowledge-based economies and societies. The influence of telecom is extending further into economies and societies as they become increasingly dependent on information, communication and knowledge networks. If telecom policy and regulation are to facilitate this extension, a more proactive role for telecom regulation may be needed. The prospects for the next stage of telecom reform are good if the lessons of experience are learned and shared. The opportunities are enormous and the challenge is daunting. It will at least be interesting.

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World Bank. (1998). Knowledge for Development. 1998/99 World Development Report. Washington DC. Ypsilanti, D. and Xavier, P. (1998). Towards next generation regulation. Telecommunications Policy (22)8. Figure 1: The decentralized structure of telecom reform

Government (Policy Development)

Policy Advisory Unit

Regulator

Board of Directors Operator Market

Direct Influence

Indirect long-term influence Figure 2: The telecom sector value chain

Equipment Telecom Service Supply Infrastructure Development

Competitive Markets Monopoly/duopoly/oligopoly Competitive Markets

Telecom Equipment Internet

Computer VAS Hardware PTOs Software Databases

Consumer Network Electronics Management Figure 3 – Distribution of global revenues for the relevant ICTS sectors (1996) Source: IDATE 1997

Computer Hardware Electronic Inform ation 12% Computing Services Services 15% 2% T elecoms Equipment P ublishing 9% 19%

Audiovisual Services T elecoms Services 8% 26% Consum er Electronics 9% Figure 4: The Major Dimensions of ICTS Convergence

Pre Convergence Sectors Post Convergence Sectors Applications • Finance Content Content Telecoms • Travel • Manufacturing • Education Computing Applications Computing • Health • etc.

Telecoms Dimensions of Convergence: • Technological • Industrial-Supply • Applications-Demand • Policies – Sectoral • Policies – Convergent Figure 5: Creating the Networks for an Information Society

Finance/ Banking Regional Disaster Management Development

Travel & Tourism Media & Cultural Manufacturing Sectors

Health/Medical Government Education/Training Services

Applications

Electronic Services Content (Pay TV, VAS, Internet) Interactivity Multimedia, etc. Broadcast (Instant & Delayed) (Public Usergroup Private) Media Voice Film Data Libraries Sound Software Graphics Telecom Facilities etc Video Network (Information Superhighway)

Computing/Information Telecom Equipment Technology Manufacturing

INFORMATION INFRASTRUCTURE

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