REGULATORY GOVERNANCE IN THE LATIN AMERICAN TELECOMMUNICATIONS SECTOR

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REGULATORY GOVERNANCE IN THE LATIN AMERICAN
TELECOMMUNICATIONS SECTOR

• Luis H Gutiérrez
• Department of Economics
• Universidad del Rosario

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Outline of Presentation

• 1. Objective and Motivation of the Paper
• 2. Background of Latin American Facts
• 3. Building a Regulatory Framework Index for
  Telecommunications
• 4. The Regulatory Framework Index Main results
• 5. Conclusions and Extensions

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Objective and Motivation

• Objective to construct an index that measures
  how regulatory governance in telecommunications
  has evolved for a sample of 25 countries in the
  Latin American region for the period 1980-2001.
• Motivation to integrate data and information on
  telecom reform more comprehensibly with
  historical and institutional factors.

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Context of the Regulatory Reform

• P laced at the beginning of 80s
• amid harsh economic, political and institutional
  environments.
• Debt crisis
• Negative or low economic growth
• High unemployment
• Countries put in place structural reforms backed
  by World Bank and IMF
• Opening
• Privatization of state owned telecom operators,
  etc

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Institutional Evolution
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Building a Regulatory Framework

• Main insights from New Institutional Economics
• Macro and Micro Polity
• Deregulation in developed countries!
• Why do the World Bank and other institutions
  demand that countries create or strengthen
  regulatory bodies for public utilities?
• Market failures lead to monopolies and
  inefficiencies
• Unregulated markets?
• Failure of the light-handed regulation in New
  Zealand

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Building a Regulatory Framework II

• Starting point Identifying three features of
  public utilities
• Technologies with important economies of scale
  and scope
• Assets are highly specific and non-redeployable
• Goods generated are necessary goods
• Effect Opportunistic behavior by governments to
  exploit quasi rents.
• Result Pricing and tariff process to be
  political

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Regulatory Process

• Regulation Design mechanism with two dimensions
• Governance
• Incentives
• Regulatory Governance involves mechanisms to
  restrain discretionary behavior by governments
  the creation of a transparent and predictable
  regulatory system (body) that can be sustained
  over time.
• Regulatory incentives mechanisms that comprise
  rules regarding pricing, subsidies,
  interconnection and other operating policies.

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• Regulatory bodies, then, key to the sound
  development of an industry
• Specialized knowledge
• More commitment to safeguard the working of the
  industry

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• Therefore, steps to create new regulatory bodies
  in the Latin American region must be understood
  as efforts to strengthen the regulatory
  environment and reduce investors' transaction
  costs, and not necessarily to increase or justify
  regulation per se.
• But, How to approach the regulatory framework?
• And how to measure it?

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Elements of the Regulatory Framework Index -RFI-

• Three main aspects
• Legal scope core element of the regulatory
  framework. It is simply the legal mandate that
  created the regulatory body.
• Reflects
• credibility
• sustainability
• Operationalization
• Congressional Law gt Presidential Decree gt Decree

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Elements of the Regulatory Framework Index II

• Separation of regulatory and operating
  activities sets the first step toward building a
  sound regulatory environment.
• Reflects
• fairness
• specialization in regulatory matters
• Operationalization
• take into account year when separation was
  mandated.

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Elements of the Regulatory Framework Index III

• Main characteristics attributes that show the
  inside strength of the regulatory body.
• Automony and independence
• Accountability
• Clarity of roles
• Transparency and participation
• Reflect confidence of stakeholders in the
  regulatory process.

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Main Characteristics

• Autonomy and Independence mechanisms that allow
  the regulatory body to be freed from undue
  political intervention, whether from industry or
  the government.
• Controversial in implementación
• Operationalization
• financial and budgetary independence
• no free removal of commissioners

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Main Characteristics II

• Accountability behavior of regulators according
  to the provisions of the legal mandate.
• Generates confidence in the regulatory process
• Operationalization
• right of appeal on questions of regulatory
  process and, in general, clear mechanisms for
  solving disputes among operators and between the
  regulatory authority and operators.

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Main Characteristics III

• Clarity of roles separation of responsibilities
  (roles) between different regulatory entities.
• Mechanisms to prevent or reduce regulatory
  capture by the interest groups and to improve
  commitment.
• Operationalization
• Set tariff
• Impose fines

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Main Characteristics IV

• Transparency and Participation composed of a
  clear specification of the rules of the game,
  opening up the process when implementing
  decisions, and mechanism to explain and publicize
  decisions.
• Avoid regulatory capture and strengthen
  investors confidence.
• Operationalization
• existence of hearings for the setting of tariffs.

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Final Factors

• Congressional Law gt Presidential Decree gt Decree
• Year when separation was mandated
• Financial and budgetary independence
• No free removal of commissioners
• Right of appeal on questions of regulatory
  process
• Set tariff
• Impose fines
• Hearing for the setting of tariff

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Caveats

• The regulatory framework index measures
  regulatory governance, not the regulatory
  incentive structure.
• The RFI reflects the letter of the law, not how
  the law is actually applied.
• The RFI could include more final factors and be
  more comprehensive.
• The RFI may involve misinterpretation.
• The RFI for some countries has reached the upper
  bound. That does not reflect a country with a
  perfect regulatory environment. It just says
  that country has advanced in the correct
  direction.

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Conclusions and Extensions

• Most countries in the region have made good
  efforts toward building sound regulatory
  governance for the telecommunications sector,
  whose effects can be noticed in the development
  of the sector.
• The regulatory framework index needs to be
  extended to incorporate more factors and to take
  into account the regulatory incentives likely to
  become more and more important in the near
  future.