PART VI 6. How to create contracts and regulate telecommunication in order to promote growth: Proposed Model

SEE states are potential candidates for EU membership, some sooner than others, and are in the process of adopting and enforcing the EU regulatory framework for electronic telecommunication.

SEE states have recently begun to liberalize their markets, driven by a series of EU Directives requiring liberalization and regulatory harmonization with other member states and the WTO requirements. The EU and WTO recommendations aim to harmonize regulatory principles to ensure consistent market opportunities for telecommunication operators. They should form the basis of the regulatory framework for SEE countries.
6. 1. Institutional and market differences between the EU and SEE countries

SEE countries should liberalize their telecom markets in accordance to the WTO and the EU Agreements. However, the market and institutional characteristics in SEE countries differ from the EU and other regional countries which in turn prevents a direct transposition of their models to the SEE countries. While the EU guiding principles embodied in the Competition Law remains relevant, the SEE countries regulatory framework should be designed in accordance with their particular conditions and specifics.

Telecommunication markets in SEE states differ in many ways from those of the EU member states and implies why the EU regulatory model can not be directly transformed to the SEE states. The differences as mentioned below arise from the SEE distinctive market composition and the broader institutional framework.

First, the past transitional experience of SEE countries in the telecommunication up to the present show that the number of mobile subscribers continue to rise over the fixed subscribers and tend to become the primary mean of access to telecommunication due to the lack of capacity, poor quality of service and low penetration. In the EU in contrast the mobile users growth is result of greater mobility and convenience but it coexist with a fixed telephony services. This difference suggests that SEE countries may need to apply the EU fixed telephony regulatory framework to mobile operators. Also the EU and the U.S. regulatory models for unbundling may serve no purpose as the mobile network is a primary mean of communication.

Second difference lies in the nature of foreign exchange controls, as in some countries it will be difficult for the operators to purchase the needed equipment to upgrade and expand the network infrastructure. This can be an important component in regulating telecommunication as the regulator authorities should take this into account when they estimate costs, when they monitor quality of service and decide upon claims that operators failed to provide interconnection capacity.

Third difference lies in the degree of market liberalization in SEE countries and the EU, and thus requires greater governmental intervention in the SEE countries.

In SEE countries incumbent operators still enjoy monopoly over the fixed network. Competing operators such as mobile providers are facing unfair competition if the provided of the fixed telephony also has a mobile business and thus enjoys a priority access to preferential treatment. Also sometimes competing operators may lack the technical capacity to provide a reasonable quality of service as being controlled by the incumbent operator that enjoys a monopoly.

The last difference has to do with the difference levels of the development of both regions as large populated areas in SEE countries especially those living in rural areas lack universal service access. This is due to the lack of network coverage or individual capacity to afford those costs, although the use of mobile phones to some extent mitigates this problem. The solution for the developing those rural areas might be in conditioning the future operator who enter the network market to provide telecenters. Thus the EU universal service regulations have little or no relevance for regulating the underdeveloped telecommunication market in the SEE countries.

The institutional separation between government and operational functions is less clear in SEE countries then in the EU countries and the political influence in the regulatory authority is more present. Regulatory authority in SEE countries is not fully independent, the state has an interest in controlling telecommunication for different reasons such as security. In general the governments influence the decision making process for granting licenses to the operators and consequently impedes the process of developing the telecommunication sector preventing growth.

The comparative and EU legislative model can not be fully and directly transferred and implemented into the SEE countries because of above mentioned economic and institutional differences. Having those differences in mind, SEE countries can still apply a number of laws and principles that govern the telecommunication sector toward their EU integration and global market liberalization. SEE countries should implement the following EU and WTO policies and principles:

Investors in any country look for the independent regulatory authority as they are interested in a minimal political interference as possible. It is believed widely that independent authority encourages investors in the telecom sector. If independence is lacking investors in the new entrants will be worried that a government having a dual power as an owner and regulator might discriminate to resolve disputes.

There is no single model of regulatory design and composition, powers, scope of authority and institutional reform, it largely depends of the legal, political and institutional characteristics of the particular country. For example: in the U.S. a Federal Communication Commission (FCC) is essentially a rule making body being fully independent form the government. In contrast the U.K. (OFCOM) is a quasi-independent issue specific-advisory, investigation and enforcement body with strong links to the Government. In the EU countries it is located in a particular ministry, such as the “Autorite de Regulation des Telecommunication (ART) in France. In some countries such as Italy and Austria a separate regulatory authorities have a power to regulate the telecom sector, seeing as a significantly weakening the exercise of power against the incumbent. The problem in a number of jurisdictions such as in UK and Sweden is the regulatory dependency on the incumbent of the provision of information a well as expertise. Under the Equipment Directive the regulators should be independent from the incumbent offering goods and services in the telecom sector.¹⁰⁵ According to Service Directive the member state should establish an independent regulatory body to carry out the regulatory functions.¹⁰⁶ This Directive does not fully address the issue of regulatory independence from the Government as owner, in part or whole of the incumbent operator.¹⁰⁷ Thus as long as Ministry has no direct relationship with an operator even the Ministry can be considered an independent regulator. In many countries there is a problem of retaining the employment staff which leads to over-reliance on seconded personnel form operators including the incumbent.

In SEE countries the Telecommunication Agency (the President and the Board) has the authority to invite tenders, authorize operators on the basis of the previously established and published criteria and oversee the development of the telecommunication sector.¹⁰⁸ It is considered as independent but literally is not as example in Serbia where the Government appoints its five members and the Parliament approves it.

In BIH and Macedonia telecom regulations are still under the authority of the relevant ministry. Albania was the first SEE country to establish an independent sector regulator. In Croatia the regulators are financially independent from the state budget.

In most of the SEE countries, the head(s) of the independent regulator is (are) appointed by the Parliament, Council or Ministers or the President based on the recommendation of the relevant ministry of the National Bank.¹⁰⁹ The responsible minister appoints the remaining board or commission members based on nominations by the chairman. In most SEE countries the sectoral regulator’s decision can not be overturned except through a court decision. The courts can nullify decisions rendered by the independent regulator but they can not impose a new decision on the issue. Therefore courts should be independent from any political influence in order to justify particular case, which is still lacking in SEE countries.

The level of discretion that exists in the EU countries as well as in the U.S. in terms of deciding which market segments and which operators should be regulated and the ability to roll back the regulation if necessary is not appropriate for SEE countries. SEE countries lack stable market and institutional environment because of corruption. Therefore the governments should enact strict and predictable rules in telecommunication sector by granting very limited and necessary discretion to the independent regulatory authority. Thereby reducing corruption opportunities states would be able to attract high quality of investors who invest in stable and predictable markets.

Some people argue that the regulatory authority should have a power sector knowledge. For the SEE countries as small countries it is more efficient establishing a multi -sectoral regulatory authority because their human and financial sources are scare and by having one agency that covers several sectors SEE countries can take advantage of economies of scale and scope. In addition the large companies can hardly capture the multi sector regulatory agency. A good example is the Public Utilities Commission (PUC) in Latvia which has jurisdiction over telecommunication, postal, railway, transportation, gas and electricity sectors.¹¹⁰ But even though the U.S. is not a small country it had a multi-sector commission at a state level for several years to regulate telecommunication, electricity and natural gas supply. The Utility Commission introduces a unified price-cap mechanism to controls the tariffs of major utility providers in regulated industries. ¹¹¹

-Appeal mechanism

The EU model requires that the states provide legal principles and effective appellate procedures with regard to regulatory decision. For the SEE countries it will be advisable to establish an appellate body for the telecommunication sector such as the Telecom Disputes Settlement and Appellate Tribunal in India.
- Simplifying bureaucratic procedures

The EU “Terminal Equipment Directive “from 1999 and Authorization Directive from 2002 are aimed to simplify the bureaucratic procedures in a transparent manner. The first Directive minimizes the administrative and certification programs and requires manufactures and operators of the equipment to produce and use telecommunication equipment in accordance with the European and international standards. Thus the new industry self reporting regulation amended the previous regulation of industries cumbersome administrative testing and certification programs. The later Authorization Directive from 2002¹¹² contains provisions for notification or intent to provide networks and services contains in order to simplify licenses procedures across the EU countries.

Only Macedonia currently has an authorization framework in place that is in line with Authorization Directive, but can not be implemented because of the above mentioned reasons. In all other countries an individual or a class license is required with some variations depending on whether the business activities involve the use of scare resources such as spectrum and numbers.

The EU 2002 package does not differentiate technology or network type in regulation. According to the package the states should regulate all electronic telecommunications transmissions networks (fixed, mobile, satellite, internet or broadcasting) consistently.

SEE countries license and regulate particular technologies and networks in differing and conflicting way and technological convergence might be beneficial for SEE countries as it require more neutral and consistent regulation approach.

- Consultation and consensus-building

Transparent and consultative process is part of any reform process in EU member states. Consultation is very useful for SEE countries as some reforms might have a different outcome in variety of market and institutional settings and they ensure that reforms would provide efficient results.

The EU package has an aim to minimize barriers to market entry by simplifying licensing procedures, and keeping licensing documents with no limit unless required by radio spectrum constraints in order to allow greater competition, reduce operators’ costs, and relieve the regulatory burden on over regulated sector.

Most SEE countries have lifted their market barriers with no entry restriction on foreign ownership and the movement of capital, but because of the corruption problem associated with granting different type of licenses investors lack confidence in the market because of the pricing method.
- Minimizing regulatory burdens

The open network provision principles such as transparency, non-discrimination, regulatory independence, objectivity and proportionality are defined very broadly at the EU level and should be tightly framed in regulating telecommunication in SEE countries.

According to the EU package sector-specific regulation should be progressively reduced in a fairly competitive environment.
Contract and regulations in the telecommunication sector in the SEE countries should be designed in accordance with the WTO and EU policies and principles for market liberalization in accordance with their market, institutional characteristics and corruption level specifics.
Conclusion
Corruption in the privatization of the public utility sector prevents FDI from promoting growth in South-East European (SEE) countries because of the legal provisions concerning creation of commercial contracts related to privatization.

Corruption influences governments to conclude contracts in the public utility sector not favorable for the state interest, as they violate by the law required legislative process for privatization such as transparency, accountability and participation.

Concluded contracts in the public utility sector are long term concession contracts (fifteen to twenty years), often incomplete and with clauses that grant investors exclusive rights and other privileges and provide inflexible pricing formula based on low tariffs. Those agreements distort market competition by creating monopolies and thus preventing growth.

In addition, the unstable political and economic conditions in SEE countries puts the questions of the stability, existence and the beneficial effect of any legal arrangements in future in the case of political party change and inflation.

Contracts are very weak and vulnerable without legal protection. Further, the state is obliged to pay damages resulting from such contractual agreements which raises the question of the positive effect of the investment.

FDI can promote growth in SEE states only if states create contracts in the public utility sector in accordance with WTO and EU policies and principles for market liberalization and with their ability to be able to commit. I propose short-tem hybrid form contracts, that are complete with the pricing method that allows flexibility and adjustments over time and commissioners instead of regulators to reduce corruption opportunities.

Source: Paul Budde Communication based on Australian Dept of Foreign Affairs&

Note: Data for Cyprus represents only Greek Cypriot area