The Determinants of Regulatory Effectiveness in Liberalised Markets Developing Country Experiences

The past two decades have witnessed far-reaching reforms in the provision of telecommunications services. Before the 1980’s, telecoms services were mainly provided by state-owned enterprises and in rare cases by private monopolies with territorial or functional licenses. The 80’s saw the role of the state being increasingly changed from that of service provider to that of regulator and policymaker. These developments were a result of technological changes that enabled some segments of telecommunications to be subject to competition. Regulatory reform was also often undertaken by governments as a strategy to attract investment in the sector to enable increased telephone penetration. Developing countries also faced pressure from Bretton Woods institutions and other international organisations to liberalise their markets. Liberalisation, privatisation and deregulation thus became the order of the day (Frempong and Atubra, 2001).

This paper deals with an issue that is often mentioned as an afterthought in discussions of regulatory reform: regulation and regulatory institutions. A review of a recent collection of writings on privatisation in developing countries reveals that little detailed work has been carried out on the experience of regulation (Makhaya, 2001). This tendency to overlook regulation is worrying as a study on developing countries found that the most disturbing issue in telecoms reform is the slow pace in developing regulatory capabilities (Achterberg, 2000). It is now a wellaccepted fact that liberalisation and/or privatisation of utilities such as telecommunications requires post-reform regulation for various reasons. These industries are characterised by natural monopoly in some segments; local calls are a well-cited example. Regulation is needed to protect consumers in areas that, even with modern technology, are still not contestable. In areas that can be opened up to competition, there are barriers to entry due to the nature of capital investment required and incumbency advantages such as customer loyalty. Competition has to be nurtured and the regulator has the power to influence the development of competition and the form it will take (Helm and Jenkinson, 1998).1 Regulation is also needed to ensure that license obligations (e.g. quality standards, interconnection) are met and to monitor the performance of any social obligations that firms have to undertake. Most importantly, regulation is needed to ensure that competition emerges in the sector. Without proper regulation, abuses of market power can go on unchecked and competition stifled.

It should also be acknowledged that privatised infrastructure facilities continue to occupy a strategic role in an economy: they have links to growth, poverty and the environment and regulation has to be put in place to deal with these externalities (Naidu, 1995). Telecommunications form the backbone of the knowledge economy. It is an important provider of income, employment and is a determinant of a nation’s competitiveness (Chowdary, 1998). Public investments in communications and transport have been linked to economic growth.2 Community economic development also flows from increasing access to telecommunications: job creation, job maintenance and the creation of home-based industries are all facilitated by access to telecommunications. All the countries that are mentioned in this discussion regard competitive 1 This observation was made for the UK experience. 2 A study of 119 countries spanning the 1960 to the 1980s found a strong correlation between economic growth and public investment in transport and telecommunications (Easterly and Rebelo, 1993). 2 prices for telecommunications services as an important policy goal, given the linkages of the sector to production in other sectors.

The issue of regulation is particularly relevant to South Africa at this stage as the telecommunications industry is undergoing restructuring. Various policy directives have been issued to determine the course of the sector’s development. The development of regulatory institutions is thus a crucial matter that needs to be adequately addressed. The regulator has various important functions to perform in this period of transition and beyond. Thus it is a cause of concern that ICASA is perceived as weak and under-resourced (Business Day, 01 February 2001). Policies such as market liberalisation and privatisation can lead to sub-optimal outcomes if the right institutions and processes do not exist. A study by Wallsten (1999) demonstrates that privatisation without competition can have negative effects. Wallsten performs a regression using data from 30 African and Latin American countries between 1984 and 1997 to show that privatisation, by itself, is negatively correlated with mainline penetration and connection capacity. Only when a strong regulator and competition accompany privatisation do gains such as increases in per capita main lines, increases in payphones and decreases in local price calls begin to emerge.

Most discussions of regulatory reform often assume that the appropriate regulatory institutions exist without exploring the validity of this assumption. This paper will attempt to identify the main determinants of regulatory effectiveness, especially in the context of setting up new institutions. The discussion will include a comparative study of the development of regulatory institutions in Ghana and Malaysia and the lessons these countries hold for South Africa. The paper will begin by a brief outline of the countries and their efforts towards regulatory reform followed by a discussion of what is meant by an effective regulator. The paper will then provide a comparative study of the determinants of regulatory effectiveness followed by a concluding section.