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
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.
country are great under optimistic scenarios of reform, but the risks also are great, and
failure may be irreversible.
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 problemsolving. 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 an expanded analysis of these issues, see Melody 1997a, Section 1 – The Purpose and Experience of
Regulation.
5
for policymakers to intervene in the detailed affairs of the PTO or the regulator except
on matters of compelling policy significance.

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.
6
For further discussion of the essential considerations for framing national telecom reforms see Melody
1997a, chapter 2.
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,
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. Crosscountry 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
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.
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
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
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.
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
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
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
10
For an analysis challenging the conventional wisdom, see Thuswaldner 1998.
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.
11
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;
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.
12
As reported in the European Commission 1997, p.10.
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
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.
13
14
Some of these issues are addressed in Ypsilanti and Xavier 1998.
For a more detailed examination of these issues, see Melody 1996.
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.
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
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).
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
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?
16
See Boulding 1996, for a seminal paper on the subject.
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
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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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 3 – Distribution of global revenues for the relevant ICTS sectors (1996)
Source: IDATE 1997
Computer Hardware
Electronic Information
12%
Services
2%
Publishing
19%
Audiovisual Services
8%
Consumer Electronics
9%
Computing Services
15%
Telecoms Equipment
9%
Telecoms Services
26%
Figure 4: The Major Dimensions of ICTS Convergence
Pre Convergence Sectors
Post Convergence Sectors
Applications
• Finance
Content
Content
Telecoms
• Travel
• Manufacturing
Computing
Applications
• Education
Computing
• Health
• etc.
Telecoms
Dimensions of Convergence:
• Technological
• Industrial-Supply
• Applications-Demand
• Policies – Sectoral
• Policies – Convergent