Challenges and policy impediments

Almost three decades ago, following many other countries, Bangladesh took the decision to break the state owned monopoly in the telecom sector. The objective was to benefit from market forces to accelerate telecom penetration, which was hovering at around one percent. The journey began with the entry of BTL for Cellular and BRTA for digital telephone service in 1989, without noticeable success in early years. In 1996, the entry of three cellular operators (GP, TMIB, and Sheba) initiated a difference in the industry. Cellular operators targeted customers waiting for BTTB's wire-line connection - the middle segment of the society.

Due to the rapid growth of global technological innovations and supply driven investment strategy of operators leading to economy of scale, the quality of cellular services started to improve and costs saw a sharp fall. As a result, cellular services expanded toward both BTCL's stronghold and the mass of the population. Such strategy has resulted in penetration growth from less than one percent to more than 70 percent over a span of 20 years. In this period, the revenue of the industry has also grown from less than USD 500 million to over USD 3 billion—almost 2.5 percent of the GDP. During the journey, the objective of expanding wire-line network through private PSTN operators faced catastrophic failure, which could be partly attributed to the Telecom Policy and Regulation.

The telecom industry has natural monopoly tendency, driven by both supply and demand side economies of scale and scope, a critical feature to reducing cost and increasing utility. The limited use of BTCL's and Cable TV's wire-line infrastructure to offer triple play services, an example of economy of scope, has resulted in high price of internet services in Bangladesh. Despite a sharp fall of wholesale bandwidth price, from BDT 28,000 to less than BDT 1,500 per Mbps, there is no proportionate change at the end user level price for broadband services. It has also contributed to poor ranking of Bangladesh in global indexes prepared by UNDESA, ITU or WEF. BTCL's less than 20,000 ADSL subscribers make Ethernet LAN, deployed by ISPs, as the source of wire-line broadband services for 98 percent subscribers in Bangladesh. The scenario is quite different in other countries though. For example, in India, for wire-line broadband services, telephone lines offer 87 percent connection in contrary to only 7.7 percent provided by Ethernet LAN. Such a depressing situation could also be attributed to policies and regulations. 

In taking advantage of economies of scale and scope, if boundaries of operators are not set appropriately, the industry will tilt toward monopoly. As BTCL or Teletalk will unlikely make aggressive investments and improve operational performance, the telecom industry of Bangladesh will likely end up in a private monopoly. Irrespective of the share holding structure, such monopoly will be harmful. Monopolies have two major limitations - deadweight loss, and lack of innovation. In pursuing profit maximisation, monopoly pricing produces much lesser than the social optimum quantity. BSCCL's pricing for international connectivity, before the advent of ITCs, is an example of such monopolistic pricing. The necessity of competition for driving innovation to create new value creation opportunity is obvious.

Three major objectives for telecom policy and regulation are to benefit from economies of scale and scope to reduce cost, to minimise deadweight loss to maximise social benefit, and to promote innovations to benefit from dynamic competition.  The core challenge appears to be the fact that progress in achieving the first objective leads to the creation of monopolistic power, which reduces competition and discourages new entry contributing to deadweight loss. A fine balance needs to be attained to maximise both consumer and producer surplus. The vertical segmentation of the industry partially addresses this challenge.

Unless there is a strong case of economy of scope, no operator should be allowed to enter in more than one segment. For example, a cellular operator does not need to enter in the application or transmission service business to benefit from economy of scope. Downstream or upstream service concerns should be handled following appropriate regulation. The policy of allowing an operator to enter into multiple segments to address quality or capacity issues must be avoided. Such entries will allow monopolistic market power accumulation through several means, including predatory pricing and increasing entry barriers. Bottlenecks in the chain should be dealt with by issuing new license, updating roll out obligation, regulating service quality, catalysing access to resources, and facilitating demand creation and aggregation.

On the other hand, economy of scope of facilities, owned by any operator, should be exploited by opening access. Intra-segment competition should be optimised to benefit from economy of scale and minimise deadweight loss. To benefit from innovation, new entries should be facilitated and competition should be optimised.

Prevailing policies and regulations appear to be suboptimal. The data of local context as well as experiences of other countries need to be gathered and analysed within sound models to derive insights and compare options to take the most effective policy and regulatory decisions. Otherwise, the telecom industry of Bangladesh will likely end up being a private monopoly—an outcome that must be avoided.

The writer is Professor at Department of Electrical and Computer Engineering,
North South University, 
Bangladesh.
Email: [email protected]