Mobile phone sector in Bangladesh
CONVENTIONAL wisdom says developing competition in services markets by encouraging private sector participation (both local and foreign) brings large gains for consumers. The gains come in different forms, such as reduced service charge, improved service quality, variety of services and easy access to service. Liberalisation of the telecom sector has been especially welcomed by users because of the supply side constraints in the telecom sector. Moreover, the advent of mobile phone technology, with its unique features of 24 hour availability and instant access, created a huge demand for it.
Although liberalisation of the telecom sector was done in the belief that it would bring benefit to the consumers in terms of cheaper price and better quality of service, that has not always been the case. Contrary to conventional belief, telecom liberalisation resulted in negative consequences for some users in some cases. Liberalisation (especially fixed line telephone) sometimes causes higher prices for customers due to tariff rebalancing and result in reduced access.
In tariff rebalancing, long distance prices fall while (to maintain rates of return) line rentals (and often local call charges also) increase. For instance, in Australia, line rentals increased by 47% after liberalisation (during 1998-2000). In the Northern Territory of Australia, connection to the fixed network had dropped by 2.3 percent after liberalisation. Service standards had also fallen. Similarly, consumers could not reap the benefits of liberalisation (such as lower price) in the UK during 1984-1990 as competition was restricted between the British Telecom (BT) and the new entrant MERCURY (which was licensed to compete with the BT in some segments), and the liberalisation was partial. In 1991, duopoly policy was ended and entrance of new firms was allowed, resulting in intense competition and significant fall in prices, and more than 50% reduction in telephone fees.
In LDC countries, telecommunications reforms have brought mixed results. After privatisation of the state owned enterprises, the prices for residential local services have risen in some LDCs with the beginning of cost based pricing and discontinuation of cross-subsidisation; however, large business users of long distance and international services have benefited from rebalancing of tariffs. In Mexico and Argentina, tariffs went up after telecom reforms.
The question may arise; why does opening of the telecom sector to both domestic and foreign competition not benefit consumers? One reason is that a liberalised market does not necessarily mean a competitive market. A market can be legally "open" to new entrants, but entry may nonetheless still be unattractive to them if the entry barriers and other costs (such higher fees for interconnection facilities, delayed interconnection etc.) become too high to be competitive and profitable.
This happened in the case of New Zealand. NZ liberalised its telecom market unilaterally in 1989. But it did not set up an independent regulatory body to oversee and monitor the telecom sector; it rather depended on generic antitrust laws. In absence of a regulatory watchdog, the incumbent telecom service provider (Telcom) created obstacles in negotiating and providing interconnection facilities to the new entrants. This resulted in a long court battle between the incumbent and the entrants, and the overall regulatory environment was not conducive for ensuring competition. The absence of a regulatory body failed to ensure fair competition in NZ telecom sector until 2000 when NZ appointed a telecommunications commission.
In Chile, the reverse has happened. Chile achieved a competitive and contestable local telephony market because of its strong pro-market reforms. It imposed interconnection obligations upon incumbents that resulted in strong and significant entry of new operators, making the market more competitive and robust.
In the mobile phone sector, in the countries that followed a sequential approach (i.e. initially awarding license to one mobile phone company, allowing it to run alone for some time, then giving the 2nd license, 3rd license and so on), the liberalisation benefits in terms of reduced cost and accessibility has been minimal. This has been the case in Bangladesh. In the initial years after mobile phone sector liberalisation (1993 - early 1997) in Bangladesh, consumers were denied liberalisation benefits. The usage price of mobile phone was very high since there was no competition during the period. This happened due to the adoption of sequential approach in liberalising the mobile phone market.
When City Cell first came to the market (in the 1990s), a mobile phone was too expensive. Connection cost was nearly $1500, and call charge was 25 cents/minute. There was no ceiling on mobile phone call charge. No authority (like ACCC in Australia) existed to restrict anti-competitive behaviour and ensure reasonable pricing by mobile a phone operator. Indeed, in the absence of an effective regulator with necessary teeth, the mobile phone market in Bangladesh during 1993-1998 was a supplier's market that earned super profits at the expense of consumers.
Thus, it is clear that liberalisation of the sector per se cannot guarantee the benefits of competition. The beneficial impacts of liberalisation can only be achieved where liberalisation is not restricted by adopting sequential strategy, and is combined with an independent regulatory body. It is, therefore, advisable for a country to put in place an independent regulatory authority to restrict misuse of market power (by dominant operator), promote competition, ensure growth of the sector, as well as protect consumer welfare. A competition commission is necessary to address anti-competitive behaviour or collusive behaviour on the part of service providers .
The good news is that the telecom regulatory authority of Bangladesh, with other government agencies, has been playing a praise-worthy monitoring role to bring discipline in the sector by curbing illegal activities in the sector and implementing measures (such as price capping) to ensure consumer welfare. Moreover, the Bangladesh Telecom Regulatory Commission (BTRC) has shown its competence, efficiency and sincerity in realising "lost revenue' of the BTTB (about Tk. 500 crore so far) through detection of illegal use of VoIP and unauthorised international call termination (it is unauthorised as the BTTB is the sole provider of international calls to and from Bangladesh) by some unscrupulous subscribers of the mobile phone operators (allegedly in connivance with the operators) (The Daily Star, November 12).
In this regard an executive of a phone company is of the view that "Many VoIP operators route their traffic via dedicated E1 circuits -- each equipped with 30 lines -- provided by the mobile operators. This indicates their clear collusion with the VoIP operators (The Daily Star, February 10, 'Foreign mobile operators involved in racket')."
The Bangladesh experience of mobile phone liberalisation suggests an important policy lesson for other countries; that is, in an industry like the mobile phone sector where network externalities and switching costs are important, delaying new entry (sequential entry strategy) creates first-mover advantages for incumbents. Bangladesh waited four years before issuing the second mobile license. It helped the first entrant to monopolise. The big advantage of simultaneous over sequential entry is that competition is initiated on a level playing field, before tariff mediated network externalities and switching costs take hold.
Moreover, in liberalising the telecom sector, the policy makers should keep in mind that a minimum number of players (may be three, four or more, depending on the market size, tele-density and availability of radio spectrum) are needed in the sector to have a competitive environment. The scarcity of radio spectrum might force the governments to limit the number of mobile phone operators. Provision for additional spectrum is a must to support mobile phone companies in providing new services such as 3G. Limiting the number of mobile phone operators is also necessary to help investors recoup their investment. Consolidation of the sector sometimes becomes necessary to sustain the growth and investment in the sector (by keeping it profitable). But the number of mobile phone companies should not be so limited that it substantially lessens competition and turns the market into a sellers one.