Regulation rules when it fosters more competition

By Dr DARRYL BIGGAR*

Critics have implied that innovation and investment in technology will suffer under changes to telecommunications regulation.

These claims are misleading at best. The proposed new regime remains significantly lighter than those of almost all other OECD countries. Intelligent, targeted telecommunications regulation can stimulate, not hinder, innovation and investment.

If the Government chooses not to make the changes proposed in the Fletcher inquiry's report, New Zealand risks looking increasingly isolated and out in the cold.

The focus on innovation in the recent debate is entirely appropriate. In the very long run, little else matters.

The problem is that there is no simple, direct link between the weight of regulation and the level of innovation.

In telecommunications, the promotion of certain forms of innovation may actually require certain forms of regulation. For example, rival firms would be reluctant to exploit new developments if they needed complementary services from an incumbent, which would get warning of the technology and would have the ability to profit from it through the interconnection price.



The New Zealand telecommunications industry is small by world standards. Last year, Telecom's cellphone subscribers accounted for only 0.3 per cent of the world total.

Most developments in the physical infrastructure of telecommunications are likely to come from overseas.

The regulatory regime could conceivably affect the rate of adoption of new technologies. But those technologies that were developed in more heavily regulated regimes overseas are unlikely to be unsuccessful in New Zealand because of regulation here.

Indeed, it is likely that the Fletcher inquiry's proposals will enhance, not reduce, innovation and investment in the New Zealand telecommunications marketplace.

In contrast to many other sectors, promoting competition in telecommunications is not simply a matter of withdrawing regulation - it requires targeted, specific action.

Regulation that unlocks competition unlocks the power of innovation. Indeed, the internet as we know it today might not have developed without the regulatory initiatives in the United States that promoted competition in the long-distance telephone market in the early 1980s.

If the international consensus is a guide, the risk is not that the Fletcher inquiry proposals go too far, but that they do not go far enough.

The key proposals include the establishment of an Electronic Communications Commissioner with powers to arbitrate disputes over access to specified services and designated services.

The commissioner's decision would be based on a set of principles, which include, in the case of designated services, pricing principles.

The inquiry does not propose any new regulation of entry to the telecommunications market, any controls on the introduction of products or services or any new regulation of prices (beyond the Kiwi Share).

In comparison, every other OECD country except Finland has some explicit price-control policies for at least some telecommunications firms. In this respect, the inquiry's proposal is still significantly more light-handed than in the rest of the OECD.

Neither is the proposal to establish an institution for resolving access disputes exceptional. Virtually every other OECD country already has some form of permanent institution other than the courts for setting access prices and/or resolving access disputes.

The only countries that have no specific mechanism for dispute resolution are Hungary and Turkey, and these nations do not even allow competition in telecommunications.

Indeed, the World Trade Organisation agreement on Basic Telecommunications Services (to which New Zealand is a signatory) obliges countries to establish some kind of system under which interconnection disputes can be referred to an independent domestic body.

Neither is the inquiry's suggested list of designated services particularly exceptional. Several countries go further, requiring, for example, unbundling of the local loop.

The inquiry does not even address other policies such as line-of-business restraints or structural separation measures, such as separation of the fixed network into regional networks (which has occurred in the US and Brazil).

Far from being heavy-handed, it is doubtful whether the Fletcher proposals would even place New Zealand in the mainstream of regulatory regimes internationally.

Rather, the recommendations would only draw us closer to the OECD consensus on telecommunications, and this comparison raises the question of whether the proposals go far enough.

The terms light-handed and heavy-handed have outlived their "best before" date. These concepts imply that less regulation is better. While this may be true in some sectors, it has never been the case in telecommunications.

The promotion of competition and innovation in telecommunications requires specific, targeted intervention, designed to best facilitate competition, innovation and investment.

At the time of its adoption, New Zealand's telecommunications regime was innovative and ground-breaking - a bold move New Zealanders could justly be proud of.

In the intervening years, however, most OECD countries have reformed their telecommunications sectors.

Not one OECD country has entirely followed the New Zealand lead.

The time has come to assess whether New Zealand wants to persist in being out of step with the rest of the world.

* Dr Biggar is a former Ministry of Commerce official who now works in competition law and policy for the OECD in Paris.