SUPRA-NATIONAL REGULATION FOR SUPRA-NATIONAL

TELECOMMUNICATIONS CARRIERS?

 

Eli M. Noam and Anjali Singhal

May 1996

 

Johns Hopkins University Foreign Policy Institute Telecommunications Project

 

 

I.       INTRODUCTION[1]:   THE NATURE OF CHANGE

 

Telecommunications regulation has evolved from a primarily domestic concern to one of international significance.   As liberalization of the telecommunications sector spreads to many countries, it also transforms the international system of telecommunications.  In particular, liberalization leads to the emergence of global telecommunications networks, alliances, and carriers, to new types of service providers, and to an end of the traditional notion of telecommunications as a national and territorial sector. The trend of supra-national carriers and ventures in turn leads to pressure on the traditional form of regulation and control of telecommunication networks.  This suggests the need to think about the appropriate regulatory structure of the new type of telecommunications firm-- supra-national carriers which transcend the traditional national and territorial definition of telecommunications operators.

Traditional regulation and policy was premised on a certain market structure.  Change that market structure, and the nature of regulation must change, too. 

 

The core of national goals in regulating telecommunications services and providers have been fairly similar from country to country.  Such goals include, explicitly or implicitly:

•           Consumer protection -- to guard against monopoly pricing, unreasonable price discrimination, low quality, gatekeeper power, and privacy violations.

•           Universal connectivity -- to spread service across the geographic and social range.

•           Protection of network operators -- assurance of adequate earnings to enable the development of networks

•           Promotion of economic growth, technological innovation, and trade.

•           Assurance of communications for emergencies, law enforcement, and national security

 

To accomplish the goals, governments have, in principle, a wide assortment of regulatory tools at their disposal such as restrictions on ownership control; market structure regulation (e.g., entry and exit control, definition of service sectors); company structure regulation; anti-monopoly rules and concentration restrictions; price and profit regulation, conduct regulation (e.g., in quality, interconnection, common carriage); investment and service approvals; and representation in trade negotiations.

These traditional tools of government were predicated on a certain industry structure.  But that structure is rapidly changing, and telecommunications are being transferred into an internationalized industry. 

 

 

II.      THE EMERGENCE OF TRANSNATIONAL CARRIERS AND

ALLIANCES

There are many reasons for the trend in transnationalization. The world-wide trend in privatization and liberalization has resulted in the possibility for new entry, and in experienced firms legally able to expand beyond their national borders.  Ownership has diversified into equity investments by firms of one country into another country, often through multinational consortia.  The globalization of large firms has led to an increase in global demand for advanced and specialized end-to-end (seamless) telecommunications services.  Such seamless services can be offered by: a) discrete bilateral or multilateral collaborations of networks (the traditional way), b) a joint entity of the participating carriers, coordinating among them and functioning as the single contact point for global users, c) a coordinating entity, owned by a single carrier, that is the global contact point for users, or d) a systems integrator dealing with various carriers, and independent of them.

The tendency of recent years has been to discard the traditional bilateral or multilateral model as too complex for users, in comparison to the seamless approach.  The traditional carriers, too, have reduced their bilateral correspondent relations.  Nor can that model benefit from the flexibility and efficiency in capacity utilization of centralized traffic management.

The main models for future contention are likely to be a combination of (b) and © -- systems integration by several (but not all) carriers, and (d) -- independent systems integration.  The first is a part-competitive, part-collaborative model centered on traditional carriers.  The second model is based on an extension of today’s resellers, and “light” and “ultralight” carriers.

The size of the market for end-to-end (or seamless) services is increasing rapidly.  Revenue is currently estimated to be several billion dollars, and to grow to $25 billion by the year 2000.[2]  These seem to be conservative estimates.  In 1992, the US market for domestic telecommunications services was $160.5 billion. The European market for domestic and long distance services was in 1992 was $120 billion.  The international market in 1994 was $55-60 billion. 

Patterns of the newly forming alliances indicate, not surprisingly, a heavy emphasis on companies from the developed world as partners.

a)         Major developed countries account for most of the demand for international service.  Participants in the alliances are largely from these countries. (29% from Western Europe; 17% from North America, and 13% from Asia/Pacific countries).  Their extra-territorial investments are partly in their home regions (though only 3% in North America), and heavily in Eastern Europe (32%) and South America (26%).  There is little partnership activity in Africa (2%).[3]

b)         Several of the largest carriers have already achieved a significant penetration of international markets.  BT is present, by way of venture activities, in markets accounting for 80% of multinational corporations, and of 57% of all international voice traffic.  Sprint, AT&T, and MCI have similar, but lower, market penetrations.  Concert and GlobalOne, two of the main alliances, have an even greater reach.

 

There are several ways in which traditional carriers can transnationalize their services:

•           Cartel -- non-competition agreement(s) among competitors which may cover prices, output levels, market shares, territories, etc.  Neither operational collaboration nor integration of resources are necessary.  This permits the participants to retain their own identity and independence

•           Consortium -- loosely organized international business combination in which companies retain their individual identities and collaborate with the other companies to achieve objectives which would not be feasible if they acted alone 

•           Joint Venture -- this can be a “contract joint venture” (strategic alliance) in which there is no exchange of equity or creation of a new entity, or “entity joint venture” which involves the creation and joint ownership of a legally separate firm by the partners 

•           Acquisition of ownership interest in one firm by another firm.

•           Merger -- full integration of resources by Firm A’s acquisition of Firm B’s assets or shares, or by putting both A and B under the control of a third entity.

 

The benefits of providing transnational service via cooperative structures include:            •           By aligning with other providers, carriers compensate for their lack of                 sufficient global presence or lack of adequate financial resources.

•           Carriers can gain indirect market access to monopolized markets where they are not allowed to compete with the local operator.

•           These affiliations spread the risk of new activities and technologies across multiple participants.

•           A consortium of carriers from several countries can pool its political influence to obtain licenses in other countries

 

B.        Supranational service providers -- there are several types of supranational telecommunications providers:

1.         Traditional multi-national carriers, primarily Cable & Wireless (UK), GTE, or ITT (in the past).

2.         Traditional collaborative carriers includes Intelsat which provides international, regional and even domestic telecommunications services as a “carriers’ carrier,” ranging from public switched telephony to transmission of broadcast signals to dedicated business services.  Inmarsat is another such carrier.

3.         Regional-Collaborative carriers, such as Eutelsat and ArabSat.

          4.       New types of international carriers, such as PanAmSat.

5.         International joint ventures and alliances


t  Concert: BT and MCI.  BT acquired a 20% interest in MCI in 1994.

 

t  GlobalOne:  Participants are Sprint, France Telecom, and Deutsche Telekom.  FT and DT each purchased 10% of Sprint in 1996.

 

t   Uniworld comprises AT&T and Unisource (itself a partnership of KPN Telecom (Netherlands), Telia (Sweden), Telefonica (Spain), and Swiss PTT Telecom).

 

t   Worldpartners is a loose coordinating agreement of carriers with AT&T, KDD (Japan), Singapore Telecom as equity owners, and Telestra (Australia), Korea Telecom, Telecom New Zealand, Hong Kong Telecom, Unitel (Canada), Telekom South Africa and Philippines Long Distance Telephone as non-equity partners.  A potential participant is NTT (Japan).

 

t   FLAG:  NYNEX is the managing partner of FLAG, a                                17,000-mile, $1.2 billion undersea “Fiber-optic Link Around the                                    Globe”.

 

t         Infonet: Participants are Deutsche Telekom and France                                    Telekom (temporarily), Telefonica (Spain), Swiss PTT Telecom,                                   Belgacom, Telestra (Australia), Telia (Sweden), and KDD (Japan).

 

6.         VENTURES BY REGION

 

a.         WESTERN EUROPE

Major ventures formed for the provision of services throughout Western Europe are: Atlas (Deutsche Telekom and France Telecom), Belgacom (Ameritech (US), Tele Danmark and Singapore Telecom), C&W Europe and Vebacom (C&W (UK) and Veba (Germany)), Gibraltar-NYNEX Communications Company (Gibraltar government and NYNEX (US)), Infostrada (Bell Atlantic (US) and Olivetti (Italy)), Mercury (C&W and Bell Canada Enterprises), Nordic Teleholding (Tele Denmark, Telecom Finland, Telenor (Norway)), and Telenordia (BT, Tele Denmark, Telenor (Norway)).

 

b.         CENTRAL AND EASTERN EUROPE AND FORMER SOVIET UNION

The potential for lucrative operations in Eastern Europe is great due to economic reform, lack of infrastructure, and high demand.  As a result, ventures have formed for the provision of services in Eastern European countries:  Armenia: Armentel (two Armenian PTOs and Trans-World Telecom (US)).  Belarus: Belcel (ComStruct International, C&W (UK), Belarus,  PTT).  Poland: Centertel: (Ameritech (US), France Telecom, Polish PTT).  Czech and Slovak Republics: Eurotel Cellular Service (US West (US), Bell Atlantic (US), Czech PTT, Slovak PTT).  Estonia:  Eesti Mobiltelfon (Estonian PTT, Telecom Finland, Telia (Sweden)).  Hungary: Matav (equity investments by Deutsche Telekom and  Ameritech(US)); Westel (Matav (Hungary) and US West International), Pannon GSM (Tele Denmark, Telia (Sweden), Nortelinvest, Telecom Finland, Netherlands PTT, local Hungarian carriers).  Latvia: Tilts Communications (Telecom Finland, C&W (UK), World Bank/IFC, Lattelekom (Latvian PTO).  Russia: Metropolitan Communications (C&W (UK) and Intertelecom (Russian PTO)), Rosnet International (AT&T, Rosnet (Russia), Intercon (US)).  Ukraine: UMC (Ukrainian PTOs, Deutsche Telekom, KPN Telecom (Netherlands), Telecom Denmark), UTEL (Ukraine Telephone Co., Deutsche Telekom, AT&T, Netherlands PTT).

 

c.         ASIA-PACIFIC

Some of the major ventures focussing on the Asia-Pacific region are Asiasat (Asia Telecommunications Co Ltd) (C&W (UK), Hutchinson Whampoa (Hong Kong), Chinese state-owned investment company); Birla Communications (AT&T and Birla Group (India)); Honeycomb International (Tele Denmark, Hysan (Hong Kong), China Unicom, Telenor (Norway)); Optus (BellSouth (US), C&W (UK), Australian investors); PHS International (Personal Handyphone Systems) (C&W, Hong Kong Telecom, Itochu Corporation (Japan), DoCoMo (NTT Mobile, Japan)); TelecomAsia (NYNEX (US) and local Thai PTO); and equity investments in Telecom New Zealand (Bell Atlantic (US) and Ameritech (US)).      

 

d.         THE AMERICAS

Some ventures for service provision in North and South America are: Canada:  MCI-Stentor (Canada); Unitel-AT&T; WorldLink Telecom (Infonet consortium and Bell Canada Enterprises);  USA:  Nextel Communications (NTT (Japan), Bank of Tokyo, Matsushita (Japan)), the aforementioned Concert (MCI and BT), and GlobalOne (Sprint, DT, FT);  Mexico:  AT&T - Grupo Alfa alliance to provide services in Mexico; equity investments in Telmex (by Southwestern Bell (US), France Telecom, Grupo Carso (Mexico)); Unicom Telecomunicaciones (GTE (US), Grupo Bancomer (Mexico), Visa (Mexico), Telefonica (Spain)). Cuba:  equity investments in Cuban PTO by Grupo Domos (Mexico) and Stet (Italy), Iusacell (Bell Atlantic (US) and Peralta family (Mexico));  Argentina:  equity investments in Telecom Argentina by STET (Italy), France Telecom, J.P. Morgan (US), Perez Company (Argentina); equity investments in Telefonica de Argentina by Telefonica (Spain), Citicorp (US), Techint (Argentina);  Puerto Rico:  Telephonica Larga Distancia de Puerto Rico (Telefonica (Spain), Puerto Rico Telephone Authority), Caribbean: C&W is present in numerous countries.

 

7.         INVESTMENTS BY MAJOR CARRIERS

Another way to present this information is according to investing company.  Major investments are listed below.

t  Ameritech:.           

a.         49.9% Telecom New Zealand with Bell Atlantic

b.         owns 40% of consortium which owns 49.9% of cellular interests in Poland and Norway

c.         owns 67% of Matav (Hungary) with DT.

d.         49.9%  Belgacom with Tele Danmark and Singapore Telecom

 

t AT&T:       

a.         10%                 Compania de Telefonos de Interior  (Argentina)

b.         22.5%  Unitel (Canada)

c.                                 Yunnan & Xhia (China)

d.         35%                 Celumovil (Columbia)

e.         30%                 Smartone (Hong Kong)

f.          35%                 Jamaica Digiport Int'l

g.         62.2%  AT&T Jens (Japan)

h.         22%                 Movitel del Norocsts (Mexico)

I.          100%               AT&T Puerto Rico

j.                                  A/O Telmos (Russia)

k.                                 UTEL (Ukraine)

l.          49%                 Birla Communications Ltd.  (India)

m.        55%                 Rosnet International (Russia)

 

t  Bell Atlantic:         

a.         jointly owns 49.9% of Telecom New Zealand with Ameritech

b.         joint venture cellular and packet operations with US West in Czech and Slovak Republics

c.         49% interest in Iusacel, second largest Mexican telecommunications company.

 

t  BellSouth: 

a.         mobile data network in U.K.

b.         paging and answering services in Australia and UK

c.         cellular and/or mobile operations in Argentina, Mexico, New Zealand, Chile, Venezuela, Uruguay, Denmark, France and Germany

 

t BT: 

a.         37.5%  Viag Interkom AG (Germany)

b.         50%                 Gibtel (Gibraltar)

c.         20%                 Personal Comm. Ltd. (Hong Kong)

d.         50.5%  Albacom (Italy)

e.         50%                 Megared (Spain)

f.          33%                 Telenordia (Sweden)

g.         100%               St. Australasia (Australia)

h.         100%               BT North America (U.S.)

I.          49%                 India Cellular

j.          25%                 Clear Communications (New Zealand)

k.         25%                 Newtone (Israel)

t  Cable & Wireless

a.         local telecom operations in 22 countries in Europe, Asia, Africa and English-speaking Caribbean and major telecommunications companies in UK, Hong Kong & Australia such as :

b.         80%                 Mercury Comm (UK)

c.         70%                 Grenada Telecommunications Ltd.

d.         57.5% Hong Kong Telecommunications Ltd.

e.         79%                 Telecommunications of Jamaica

f.          80.7% Paktel (Pakistan)

g.         51%                 Yemen International Telecommunications Company

h.         20%                 Bahrain Telecommunications Company

I.          49%                 Fiji International Telecommunications

j.          17.58%            International Digital Communications (Japan)

k.         39.90%            Tele 2 (Sweden)

l.          24.50%            Optus Communications (Australia)

m.        21%                 Lattelekom (Latvia)

n.         45%                 Dhivehi Raajjeyge Gulhun Private (Maldives)

o.         joint ventures with Veba in UK and Germany

 

t Deutsche Telekom

a.         50%                 MagyarCom (Hungary)

b.         16%                 Matav (Hungary)

c.         25%                 PT Satclindo (Indonesia)

d.         27%                 Mobil Telesystems (Russia)

e.         20%                 Teletes (Turkey)

f.          16%                 Ukrainian Mobile Comms.

g.         19.5%  UTEL (Ukraine)

 

t   France Telecom

a.         10%                 MoviStar (Argentina)

b.         19.5%  Telecom Argentina

c.         40%                 Socatel (Central African Republic)

d.                                 TDF (Czech and Slovak Republics)

e.                                 DGCT (Equitorial Guinea)

f.          49%                 Telecoms Ext. de la Polynesia Francais (Fr. Polynesia)

g.         35%                 Panafon (Greece)

h.         49%                 Operator Hungaria

I.                                  BPL Systems (India )

j.          100%               Martinique operator

k.                                 RadioMovil (Mexico)

l.                                  Telmex (Mexico)

m.        49%                 OPT -New Caledonia

n.         25%                 Centrel (Poland)

o.         11%                 Mobil Telesystems (Russia)

p.         24%                 Societe Nationale de Telecoms (Senegal)

q.         20%                 St. Pierre & Miguelon

r.                                  Teco Tasa (Uruguay)

s.          33%                 Vanitel (Vanuatu)

t.          33%                 Vanitel Cellular (Vanuatu)

u.         90%                 Mobistar (Belgium)

v.         100%               FTIVS Nordic (Sweden)

 

t    GTE        

a.         controls British Columbia Telephone Co. and Quebec Telephone in Canada

b.         100%               national PTO in Dominican Republic

c.         20.4% Venezuelan PTO

d.         partner in cellular consortiums in Germany, Argentina and Japan

e.         provides international telecommunications services to Moscow hotels

f.          4.5%                Tu-Ka Kyushu (Japan)

g.         joint venture in China to provide paging services

 

t   MCI

a.         23.5%  Belize Telecom

b.         49%                 Avantel (Mexico)

c.         25%                 Clear Communications ( New Zealand)

d.         100%               MCI de Venezuela

e.         15%                 Newtone (Israel)

 

t   NTT

a.         NTT is Japan’s dominant domestic service carrier.  It faces limitations on its international role (where KDD long held an exclusive franchise), and is subject to government review of its structure.  Partly as a result, it has been less active in supra-national ventures than its size as the world’s largest telecommunications company would indicate.

b.         Thai Telephone & Telecommunication Public Company (TT&T) -- installation of  one million telephone circuits through much of Thailand.

c.         Nextel Communications (US) -- participation in first US nationwide wireless network based on SMR truck dispatching frequency allocations.  NTT paid $75 million for 0.9% share.

d.         General Magic -- develops and licenses software to communications providers.  NTT is one of General Magic’s 14 principle partners, which includes Apple, AT&T, C&W, and France Telecom..

e.         NTT FAN (Future Agent network) -- to test provision of multimedia services in Japan.  NTT owns 44% f this venture.  Other partners are AT&T and Sony, each with 28%.

f.          15% Smart Communications (Phillippines)

g.         2%       Nextwave Telecommunications (US)

h.         Agreement with Unicom (China) to build provincial GSM networks

 

t   NYNEX

a.         joint venture partner in major telecom projects in Thailand, Phillippines,  Indonesia, Gibraltar

b.         FLAG --- fiber optic undersea cable system linking the UK and Japan (and a dozen intermediate points)  via the Red Sea and the Indian Ocean

c.         cellular joint venture in Greece and Japan

d.         major cable TV holdings in UK, which also provide local telephone service.

 

t   Pacific Telesis

a.         cellular operations in Germany, Portugal, Sweden, Belgium and Japan

b.         paging system in Thailand, France, Spain and Portugal.

c.         9% interest in trans-Pacific cable between Japan and US

 

t   Southwestern Bell

a.         $935 million investment in TelMex, Mexican PTO

b.         alliances also in Australia, Israel, UK

 

t   Sprint

a.         51%                 Sprint Movil SA.  (Argentina)

b.         100%               PTL (Sprint) Lmtd. (UK)

c.         60%                 Sprint Bus. Telecom Co. (Bulgaria)

d.         100%               Sprint Communications Canada

e.         49%                 Alcatel Data Networks (France)

f.          26%                 Sprint RPTelekom (Poland)

g.         100%               Sprint Japan, Inc.

h.         100%               Sprint Holding Ltd. (UK)

I.          50%                 Rosprint (Russia)

j.          50%                 Sprint Networks (Russia)

 

t   Swiss PTT

a.         25%                 Unisource global venture

b.         27%                 SPT Telecom (Czech Republic) with PTT Telecom                                                       Netherlands

c.         30%                 joint venture to operate GSM networks in 3 states of India

d.         30%                 Muitara Telecommunications Sdn Bhd (Malaysia)

 

t   Telefonica (Spain)

a.         Long distance operation of Puerto Rican PTO

b.         44% of Chilean telephone company and 20% interest in Chile's international long distance telecommunications carrier, which also owns cellular operations. 


c.         10% of the consortium which owns PTO of southern Argentina

d.         owns 15% of consortium which owns Venezuelan PTO

e.         won bid for Peruvian PTO

f.          cellular franchise in Romania

g.         40% of Chilean cable-telecommunications joint venture with TCI (US) and two Chilean companies

 

t   Telia

a.         co-owner of Unisource. 

b.         holdings in telecommunications companies:

1)         Russia

2)         Estonia

3)         Latvia

4)         Hungary

5)         Italy

6)         United Kingdom

7)         France

 

t   US West

a.         joint venture cellular and packet operations with US West in Czech and Slovak Republics

b.         personal communications network operations in UK

c.         international telecommunications gateways in Russia and Lithuania

d.         joint venture in cable television/telecommunications operations with TCI in the UK.

 

C.        New types of transnational carriers

In addition to alliances of existing carriers, new kinds of carriers are also emerging such as:  Low-Earth Orbiting Satellites (LEOs) ventures which are usually comprised of many investors.  For example, Iridium is owned by over 17 companies from 9 countries.  Other LEO ventures are Global Star, Odyssey, Teledesic, and Inmarsat-P.

Light carriers are non-facilities service providers and resellers of telecommunications services that purchase bulk services from telecommunications carriers.  International simple resale (ISR) involves the use of leased international private lines interconnected to the public switched network at both ends to provide traditional switched services.  ISR permits entry into a foreign country that provides dial up and dedicated access to customers similar to that available from traditional carriers;           

Ultra-light carriers originate calls in foreign countries without establishing a traditional network presence.  They operate entirely from abroad.  The major service offered is"call back,” which enables a consumer to take advantage of the lower prices offered in one country while he is in a country that has high monopoly prices.  Call-back service is basically network arbitrage and is done by resellers who lease high capacity circuits from facilities based operators;


Systems integrators will not own or operate the various sub-production activities but rather select optimal elements in terms of price and performance, package them together, manage the bundles, and offer it to the customer on a one-stop basis.  They will offer individually tailored "virtual" network arrangements that serve individualized communications needs;

Internet telecommunications is made possible by applications such as Internet Phone which enable telecommunications via the Internet.  The dynamics of this development go beyond computer applications.  Since the Internet is presently distance-insensitive in respect to price, it is also a means of long distance and international service.  This additional level of competition offers substantial opportunities for new entrants, and exerts additional pressures on traditional carriers to meet the challenges of a future which is likely to consist of non-hierarchical, interconnected networks of networks.  These pressures will also affect carrier structures, modularization, and organization of the entire company, not to mention pricing, business strategy, and alliances.

 

III.    THE IMPACT OF NEW GLOBAL TELECOMMUNICATIONS ON TRADITIONAL REGULATION

 

The change from regulated national and governmental carriers to competitive, private transnational companies affect the traditional approaches of regulation.  The impact of these new global telecommunications arrangements range from serious to minor and from concrete to hypothetical.  

•           An asymmetric liberalization in different countries permits an extension of national market power from a relatively protected market into an open one.

•           The free flow of information is based upon national rules about content policy.  National efforts to control content by one country may wreak havoc on the entire system of information flow across countries. 

•           New forms of consumer fraud from distant locations become possible and harder to purge. 

•           National encryption rules and escrow standards could create compatibility and confidentiality problems.

•           National regulation of prices and profits can be undermined by accounting shifts of revenues, costs, and productivity gains among jurisdictions.

•           Through international arbitrage, countries lose control over the price structure. This means, among others, that universal connectivity in a country needs to be financed in new ways.

•           The question of which country has jurisdiction can create conflicts.

•           National labor laws can be undermined by the ability of carriers to shift activities to other locations. 

•           Catastrophic network crashes could spill across borders.

•           Quality standards are harder to maintain in an international chain of transmission.  High quality countries may be negatively affected.  Conversely the imposition of high quality standards world-wide may impose a cost on low-income countries.

•           Loopholes for privacy and data protection can emerge.

•           Foreign investment rules can be undermined by intricate relationships among carriers.

 

While it is important to be alert to new problems, the good news is that most of the issues outlined here are either hypothetical, or do not suggest an imminent crisis.  This gives us time to think.  What, if anything, might be done.  Several options exist, including doing nothing.  To evaluate the choices, we must first establish some theoretical framework.

 

IV.     A THEORY OF MULTI-JURISDICTIONAL REGIMES

 

The choice of regulatory arrangements and institutions is not merely procedural but also is policy determinative; i.e. it has an important impact on substantive outcomes.  The determination of the regulatory structure is not just a question of historical tradition, functional efficiency, or economic externalities.  The determination of the regulatory level, for example, can be in itself a decision about the strictness of regulation that will prevail.  Interest groups pragmatically desire the regulatory structure whose outcome they like best, and the relation between group strengths and benefits determines the preferred system of regulation.   


The following will provide a simple economic framework to analyze a regulation in its intersectoral and international dimensions. We start by narrowly defining regulation as the setting, by a regulatory body, of a  price vector R for a set of economic activities. A total prohibition is an infinite price; total laissez‑faire approach means a vector of market prices; most regulation is somewhere in between and can be viewed as a way of making an economic activity costlier (as for example in telemarketing) or cheaper (as for example in residential telephone usage). Various interest groups are affected by the setting of these prices, and they seek favorable Rs by exercising pressure through the political process.

Regulation is set by the agency according to some optimization criterion. This criterion is, of course, the subject of some debate.  For those who hold the "public benefit" view of regulation, the agency's objective is to maximize the benefits to society; for others, it is to maximize the agency's self-interest.[4]  These two criteria are not necessarily inconsistent if we assume that an agency sets the restrictiveness of regulation to a maximize its total political support, and that such support is a monotonously increasing function of aggregate benefits.

Now assume that the regulation in one country may affect the interest groups in the other countries as well.  For example, manufacturers in country A is benefitted by B's regulation if, for instance, its competitors in country B must contend with the added costs from regulation.  In other instances, the cross-border effect of regulation would be negative, as in the case of transborder data flow laws. The less protected data are in one country, the tighter the other may become in response, as a defensive measure.  The a regulatory strictness in A is therefore, among others, a function of country B's regulation.  Thus we have a “reaction model,” depicted in Graph 1, in which each country adjusts its regulation in response to the other country’s regulatory strictness.


 

GRAPH 1

 

Reaction Functions of National Regulations


 


This process leads either to an equilibrium at the point of intersection, or to "corner solutions"; the latter are occurring where countries drive each other into total deregulation or into total prohibition. A good example of a competitive deregulatory trend within the United States is the increasing liberalization of state laws governing corporations, a process which has been described by a former Chairman of the Securities and Exchange Communication (SEC) as a "race the bottom." A "race to the top" would be where each jurisdiction attempts to shift undesirable activities to its neighbors, or tries to avoid becoming the recipient of its neighbor's undesirable exports.  An example is the regulation of radioactive waste, where each jurisdiction would like the other to be the recipient.  Other examples include: (a) lower telephone rates, if one wants to attract business from the other jurisdiction; (b) stricter data privacy, to prevent undesirable activities from spilling in, e.g., by telemarketers.

The important point is that there is no need for formal coordination between countries A and B; an equilibrium can be reached by unilateral actions and reactions aiming at unilateral optimization.  In some cases, the reactions of both countries are such that no equilibrium is reached, but rather corner solutions, which are not the outcome sought by either country.  In other circumstances, an equilibrium regulation may emerge, but might be sub-optimal.

To deal with the problem of unstable or undesirable equilibria that emerge under a non-coordinated system, the countries may agree that the regulation be coordinated.  Several courses of action are possible.

 

V.      INSTITUTIONAL OPTIONS FOR REGULATION

Following the theoretical discussion of Section IV and the identification, in Section III, of the regulatory issues raised by supranational carriers, we can now address the institutional options for regulation.  The menu of possible approaches is quite long; ranging from centralized supranational agencies to doing nothing.  A few of the major ones will be discussed below.

 

A.        SUPRA-NATIONAL REGULATORY AGENCY

The most extreme way to conduct international coordination, if such is the overriding goal, would be to establish a supranational regulatory body with full authority to supersede national institutions.  But this would severely reduce national sovereignty, more than most governments -- and individuals -- would be prepared to accept in the absence of truly major problems that cannot be dealt with otherwise. 

Supra-regulation is not invariably stricter than particularized regulation.  In telecommunications, for example, the regulatory principles of the European Commission are less strict than those of most of the  member states. In the United States, the same holds true for the FCC relative to the many of the state Public Utility Commissions. But the reverse is also often the case, as for example in the regulation of cable TV in the US.


One question is why interest groups (or a whole country) would consent to supra-regulation.  Would this not dilute the power of dominant groups?  This is indeed true. Therefore, a dominant group will normally consent to a shift to supra-regulation only where its favored policy would be enhanced, e.g., if the balance of power of interest groups in the other sector is even more favorable to its concerns.


However, for symmetrical reasons, the dominant group in the other sector would then oppose supra-regulation lest it dilute its own influence.  “Log-rolling” aside, this then leaves as the primary reasons for mutual joining of supra-regulation three cases:  First, when the balance of power is essentially equal in the two sectors, so that supra‑regulation does not make much difference, and may be administered more efficiently.  This is why policy coordination is easier among West European countries than, for example, Pacific ones.  Second, when supra-regulation can establish a policy cartel to avoid separate regulation to affect each other and to lead to results that are considered sub-optimal by the dominant groups. This is more likely to be important where the cross elasticity of regulation is high, which is the case with sectors or countries that interact strongly with each other.  And third, when the supra-regulation is part of a larger effort and common goal, such as the achievement of European unity.

The problem with any supranational regulatory structure is its instability.  One country's adherence to a supra-policy provides the other with an opportunity of gain by seeking its own course.  Also, supranational bodies create a distance between the objects of regulation and the decision-making process.  They weaken grass roots participation.  The European example illustrates this.  And, transaction and information costs of the decision process are likely to be significant.  Each decision carries great weight and is consequently fought over more fiercely than in the case of smaller jurisdictions. 

 

B.        TWO-LEVEL REGULATION WITH PREEMPTION

Instead of folding national regulation into a supranational body, an alternative is to create a two-level regulatory structure, with national and supranational agencies co-existing.  A similar situation exists in the United States, where the federal FCC co-exists with the state public utility commissions. A related system is evolving in Europe. 


A multi-level structure, to be effective, requires the power of the top level to preempt lower-level rules which are inconsistent with its own rules.  This inevitably results in a strengthening of power by the center over the member countries by subjecting them to increased restrictions in exercising their authority.

 

C.        HARMONIZATION

Countries can also negotiate coordination agreements among themselves.  Coordination of telecommunications policy among countries tends to center upon harmonization, i.e., uniform rules.  Such rules may also be set in a cartel-like fashion to prevent innovation, including liberalization.  The inherent problem of European harmonization is the tension between liberalization and harmonization.  The former seeks to advance substantive goals.  The latter is procedural, aiming at eliminating inconsistencies among countries, supplanting proper policy in favor of uniformity.

In harmonization, the issue is not the strictness per se, but the importance of being identical. There are situations where efficiencies exist in uniformity or connectivity. The width of railroad gauge or protocols in telecommunications are examples.  Technologists tend to favor standardization. Economists have more mixed views, because uniformity has its costs. To have cars with identical pollution controls in both Australia and Japan may not necessarily be optimal for either or for both jointly.

There are incentives for one state to be nonuniform. Examples include large countries for whom international interaction may be small in relative terms, such as the United States, which, e.g., can still afford a non-metric system of measurements. At the same time, many other examples for non-conformity in regulation are small countries, or states: Switzerland in banking; Delaware in corporation law; Hong‑Kong in tariff duties; Liechtenstein in taxes; Monaco in gambling; Luxembourg in broadcasting. These  examples suggest that small countries, especially, have incentives to being nonconforming, probably since the loss in revenue, control, etc. from their own relatively small domestic economies is more than offset by the inflow from the larger countries due to nonconformity. To prevent such non-uniformity, the other states have to impose substantial pressure on the maverick jurisdictions or pay them significant compensation.

The historic experience provides ample warning: in telecommunications international cooperative agreements have usually been cartel arrangements.  Powerful and effective telecommunications organizations are still dominant in every country, and if the literature on the dynamic between regulator and regulatee means anything, they will sooner or later capture the cooperative regulatory process as they have in their respective countries.  At that point, harmonization at the center, even if initiated in the interest of reform, will not be a tool for reform, but its opposite. 

 

D.        DISPUTE RESOLUTION BODIES

Instead of ceding regulatory authority to another substantive agency, countries may refer regulatory disputes to a general dispute resolution body.  The International Court of Justice and the European High Court of Justice are examples.  The dispute resolution approach is used in a supplemental accord to the North American Free Trade Agreement (NAFTA), the North American Agreement on Labor Cooperation (NAALC).


The problem with this approach is that a dispute resolution needs to be in reference to some agreed upon rules which are non-existent in telecommunications.  Hence dispute resolution would center mainly on general legal principles such as compensation for nationalization or prevention of cross-border interference.  While these are not trivial issues, it would be much harder to deal with substantive telecommunications issues such as interconnection and access charges.  Another major problem with dispute resolution is the extent of its enforcement.  Is it binding?  And if it is ignored, what is the redress?

 

E.         SPECIALIZED INTERNATIONAL TELECOMMUNICATIONS BODIES 

Non-binding international bodies are another method of coordinating telecommunications policy.  They lack enforcement power, and their influence to hold members to an agreement is indirect.   The major example of a specialized institution is the International Telecommunication Union (ITU), the world's oldest intergovernmental organization on any subject.   However, by including virtually every country under its umbrella, the ITU finds it difficult to satisfy both rich and poor countries.  In some cases, countries with advanced telecommunications sectors control its agenda, partly because they may have more at stake in terms of the investments already incurred.  In other cases, poor countries, by their sheer number, have the votes to set the agenda.  The ITU’s diverse membership has lead to the creation of regional specialized telecommunications organizations and unwieldy.

 

F.         GENERAL INTERNATIONAL COORDINATION BODIES

General international coordination bodies such as the World Trade Organization (WTO) set telecommunications regulations within the context of other important issues, rather than in the context of single issue advocacy.  The diverse range of issues before such organizations may result in inadequate attention and  understanding of; or result in log-rolling negotiations ('You give us potatoes, and we’ll give you telecommunications.')  General coordination bodies are not effective supranational regulators.  Coordination of policy among the diverse members is difficult.  As a forum for raising issues they are satisfactory, but as a vehicle for specifics, they are often inefficient. 

 

G.        REGULATORY TREATIES

Countries may enter into formal agreements which regulate their actions, such as the raising or lowering of barriers to trade.  These treaties -- bilateral or multilateral -- usually must be ratified by each national legislature.   Establishing negotiated agreements in broad-based multilateral regimes becomes more difficult as the number of members increases due to their varying economic, social and political conditions and differences in culture and historical institutions.  The General Agreement on Tariffs and Trade (GATT) was an example of a multilateral treaty.

Such agreements share the problem of private cartel agreements, since each country holds some veto power if uniformity is sought.  Just as a convoy travels at the speed of its slowest ship, so does regulation by treaty not extend beyond the point where each country is at least as well off as before, assuming that no international compensation exists, and that unanimity is required. 


Agreement will stop at the point where marginal benefits of marginal regulation will begin to be negative for at least one jurisdiction.  This would be at a level of strictness where the first country experiences a regulatory optimum.  This would be the lowest common denominator.  In effect, any particular dominant interest group in any one country would determine the regulatory structures for all countries, holding, in effect, a veto.  This could be extended a bit where compensation to some participants is possible, which is one of the ways the European Union operates the agricultural field.

 

H.I.      RECIPROCITY

Reciprocity means that country A will extend non-discriminatory regulatory treatment to services or companies of country B, provided that B treats A’s firms similarly.  In effect A can invite B to take a common regulatory position by offering reciprocity.  Reciprocity can be based on a mirror-image (item-by-item comparison of treatment between countries which may create regulatory grid-lock because no country may make the first move) or equivalence standards (which requires a showing that equivalent, rather than identical, conditions exist in the foreign market).  

 

I.          AD-HOC COOPERATION

Ad-hoc cooperation is informal and addresses problems as they arise, on a case by case basis, especially in law enforcement.  The informality and the expert focus of this arrangement tends to produce results; on the other hand, it may also revolve around personal relationships of individuals whose participation may change.

 

J.         REGULATION BY LENDING INSTITUTIONS

International financial development institutions such as the World Bank, the European Bank for Reconstruction and Development, and the African Development Bank often condition loans or grants on economic structural adjustments.  In order to receive economic assistance, the developing country is often required to undertake reforms, such as cuts in spending, establishment of market principles, privatization of the government owned companies, and monetary reform.

In this manner international financial organizations can regulate certain practices of developing countries.  The World Bank has been successful in institutionalizing regulatory telecommunications policies such as privatization and market access. 

The problem with the option of regulation by financial lending institutions is that it would require banks to become involved in overseeing the internal development of the telecommunications infrastructure.  This leads inevitably to tensions between lender and borrower, and between liberalization and financial solvency.  The conditions for loans erode the borrowing country's sovereignty, and fuel the ire of nationalists.  Furthermore, when liberalization may lead to a financial weakening of the operators' ability to repay loans, a lending agency may rediscover its preference for the greater security that protectionism provides.

 

K.        COORDINATED ADVOCACY BY INTEREST GROUPS

One way to reach coordinated policy is through interest groups rather than through governmental bodies.  Such interest groups would coordinate their advocacy to seek relatively uniform results across jurisdictions.  To accomplish coordination, several umbrella organizations for large users exist.  For example, the International Telecommunications User Group (INTUG) represents business users. At present there are no equivalent coordinating organizations on the consumer side.  Under the cross-border monitoring arrangement under NAFTA, Mexican and American telecommunications labor unions cooperated in lobbying the Mexican and American governments.

 

L.         COORDINATION BY OPERATING COMPANIES

Instead of coordination by government agencies, it is often much simpler for the operating companies themselves to deal with problems.  These operating companies can coordinate their activities to achieve network and service integration, regional cooperation, product and standards coordination, etc. Examples of this model are the Caribbean Association of National Telecommunications Organizations (CANTO) and State Companies Association of Telecommunications of the Andean Sub-regional Agreement (ASETA).

The advantage of this approach is that it tends to be oriented towards problem-solving.  The disadvantage is that it becomes early an instrument and enforcer of cartel collaboration.  In the past, when PTOs were state operations, inter-company coordination was identical to inter-governmental collaboration.  But at least it was subject to political accountability, which is less the case for private companies.

 

M.       FOREIGN INTERVENTION IN NATIONAL PROCEEDINGS

Because domestic and international telecommunications policy issues are intertwined, one way to coordinate is for the domestic policy process to be accessible to international participation. This requires the regulation process to be open, publicized, and following a clear procedure. Due attention would be given to another country’s submission on the merits.  It also includes advance notification of enactment of regulations. 

The German government (or Deutsche Telekom), for example, has commented in FCC proceedings which affect Germany.  Such a recent proceeding was the FCC review of the BT-MCI petition to deny approval to the Sprint-DT-FT (GlobalOne) alliance.  Another example for regulatory intervention was the US government's comments in 1995 to the Japanese Ministry of Posts and Telecommunications on the subjects of liberalization and interconnection.

To be successful, the process must be a two-way street.  By entering another country's regulatory process, a country must grant similar opportunities in reverse. 

 

N.        USER COORDINATION

Rather than relying on coordination by countries or carriers, users may coordinate their activities and protocols internationally by forming their own coordinating organizations. An example for this model is the Internet and its governing bodies.  Among other things, these bodies set technical parameters and protocols, basic rules on usage, and establish filtering methods which would comply with local and country content laws.  The problem with this model is that compliance is largely voluntary, and that difficulties arise in attempting to coordinate millions of users worldwide.

 

O.        NON-COORDINATION UNDER COMPETITION

One way to coordinate telecommunications is by letting market forces do the work of harmonization.  For example, if a carrier shifts costs and revenues from one jurisdiction to another in order to benefit from different regulations, one way to deal with the problem would be for regulatory agencies to agree on how to treat these cost allocations, how to monitor them, etc.  But would it not be simpler to let competition in both jurisdictions prevent such manipulation in the first place, by making manipulative pricing non-sustainable?

A competitive coordination means creating open telecommunications markets across multiple countries.  But this strategy does not solve all problems.

1.         Some countries are more likely to be open than others.  The problems of asymmetric deregulation were discussed earlier.  Even if countries A and B are open with respect to each other, carriers could use the less open country C to distort competition inside their own countries and between A and B.  True, competitive forces will eventually force C to change its ways, but this may take a long time.                                             

2.         Not all problems are resolvable by competition.  For example, consumer fraud by third parties is not a market issue, but a law enforcement problem.

3.         In some cases there would be no stable market solution due to negative externalities.  For example, data collection might shift to international operations, and market forces would not readily remedy the privacy problem.

4.         Certain arrangements, such as the subsidization of the poor and rural customers are outside market mechanisms. 


 

Despite these qualifications, it appears that as more countries put faith in competitive markets to control mechanisms to economic power, and as they actually achieve such markets, there will be less need for coordination by regulators.  Instead of dealing with supranational carriers by supranational regulation, one may instead use supranational competition for that purpose.  This said, one cannot ignore the transition problems and asymmetries in the short term, and in the long term negative externalities and public goals, such as subsidization of connectivity and protection from consumer fraud.  Those, however, could be dealt with by national policies, coupled with international cooperation in law enforcement.

 

VI.     CONCLUSION

International opening has created, in a few short years, an astonishing number of global telecommunications activities, with no end in sight.  A multitude of policy issues is associated with supra-national carriers.  Not surprisingly, these issues are too varied to suggest a single approach of supra-national policy and regulation.


Fortunately, most of these problems are not of immediate seriousness.  Some immediate issues are those of transition, such as the requirements to reform the international accounting rate system and the resultant need to reform the financing of universal connectivity.  Requiring attention are also the problems of asymmetric liberalization, with its potential for discriminational extension of market power.  The most serious immediate issue is the threat to global free flow of information by the need conform to the policies of restrictive countries.  Similarly, the potential for new types of consumer fraud is disturbing.

There are numerous options for countries to coordinate regulatory policies.  Not surprisingly, each option is a trade-off of advantages and disadvantages.  The spectrum of options ranges, on the one extreme, from highly centralized arrangements such as supranational agencies with full autonomous powers, to full reliance on market forces, without any inter-governmental action on the other extreme.  Even in the absence of formal coordination, countries adjust their policies to each other.  This means that some countries, by taking a leading role in some policy reform, can nudge other countries to change their ways.  The US, for instance, has taken a fairly unilateral approach in liberalizing its telecommunications sector.  By supplementing this stance with the use of reciprocity in determining whether to grant certain privileges to companies from another country, it has encouraged other countries to liberalize their telecommunications sectors. 

Unilateral adjustments are not necessarily effective, however, in the problems of repelling undesirable activities from other countries or to attract business by becoming a "haven" country.  Similarly, a unilateral strictness of one country can become a de facto international standard if it is too risky or burdensome for users to conform to different rules. 

As the matrix of international interrelations becomes steadily more cross‑elastic, the overall tendency, in the long term, should lead to reduced regulatory strictness internationally, too.  In that sense, liberalization is an expansionary process. It is not so much an ideological choice, but a response to an internal inability to structure a stable equilibrium that serves multiple interests and goals.

When supra-national regulatory solutions are contemplated, it must not be forgotten that the history of international telecommunications agreements and collaborations, from their earliest days, has been one of creating an international cartel to prop up national monopoly arrangements. The goal of most international bodies was to stabilize rather than to open telecommunications markets. It would be surprising if the new supranational regulatory arrangements would not similarly be captured by the established telecommunications operators, or be driven by broader motivations not primarily of telecommunications.

Hence, the benefits of any new international collaborative arrangements to dealing with new problems must be weighed against their cost in transaction costs, and in particular against their impact in reducing policy innovation by various countries.

In many cases, the best coordination mechanism would be through market forces and arbitrage rather than through inter-governmental collaboration. This would suggest a liberalization and a reduction in deregulatory asymmetry rather than the creation of regulatory symmetry.  It must be understood that the absence of formal coordination among countries does not mean that countries do not adjust their policies to each other.  Such reactions will lead to stable equilibria in many cases such as issues of restrictions on foreign ownership; lower telephone rates, if one wants to attract business from the other jurisdiction; and stricter data privacy, to prevent undesirable activities from spilling in, e.g., by telemarketers.

However, market forces by themselves do not deal with all policy problems, such as redistributive goals, negative externalities, law enforcement, and the transition to a competitive system which may require interconnection arrangements.  But these are primarily national issues, calling for national responses, with some international coordination.  In other cases, however, no equilibria are likely, for example with labor laws -- some countries may undermine others' labor laws to attract investments.

 

Thus, the best way to deal with problems brought about by supra-national carriers would be by a flexible and diverse set of approaches:

* Countries should support each others' consumer protection and other law enforcement actions against fraud.

*  Countries should not support each others' efforts to limit competitive entry.

* Coordination among users, or within systems integrators, can lead to harmonization that is not run by governments, as long as they remain within antitrust limitations.

*  For specific problems, countries could establish ad-hoc collaboration of regulatory agencies. An example is to prevent the crash of a carrier spilling into other countries.  This could include some joint task forces, but it might be less, such as following a “lead agency” of one country.  An example would be to have an agency of one country looking at potential, anti-competitive aspects of a trans-national merger.

* Countries should actively participate in other countries' regulatory proceedings which affect them by providing comments, on the record, that would be taken into account.

*  Countries should use the equivalence or rough equivalence standards of reciprocity in assessing other countries' openness, interconnection, privacy and quality protection.

*  Serious jurisdictional conflicts could be submitted to a voluntary dispute resolution body, which would determine which country has primary legal jurisdiction.               


*  Traditional policy goals such as universal connectivity can be pursued by putting burdens on all carriers neutrally, instead of by way of cross subsidies within a monopoly.  These do not require international uniformity, unless a country is seriously out of line.

 

Thus the main conclusion is not to create elaborate mechanisms of policy coordination. The history of these mechanisms is one of retarding change by an emphasis on consensus, stability, and harmonization. These are values appropriate to government utilities, not to a high technology sector undergoing revolutionary changes. If anything, telecommunication has historically been cursed with an excess of policy collaboration, and with a compulsion to protect against many hypothetical problems well in advance.  Today's priorities are not the solving of every conceivable problem, but the creation of opportunities for the new information age.  Where problems emerge, they can be dealt with at the time.

This does not mean that only market values should govern. For example, if a country wants to subsidize the connectivity of its poor and rural populations, it can do so by, e.g., a surcharge on all communications services and the creation of a universal service fund.  There is no need to protect subsidies through a protection of the entrenched monopoly, and through a subsequent defense of that system internationally against competitive international rates.

It might be different tomorrow.  But today, the world of telecommunications needs more policy experimentation and less harmonization.


     [1]This article originates in a larger study on supranational carriers by Eli Noam and Anjali Singhal. The author wishes to thank Douglas Galbi, Carla Kreft, Carla Legendre, and Alex Wolfson for their help.   All views expressed are solely attributable to the authors.  An earlier version of this paper was presented at the conference on “The Future of Telecommunications -- Technology, Organization, Regulation” held on November. 17, 1995 by SNF (Stiftelsen for Samfunns- og Naeringslivsforskning) at Bergen, and supported by that institution.   We are thankful, in particular, to Svein Ulset.

[2]FCC, Staff Report on Global Alliances (in preparation), 1996.

[3]Ibid.

_     [4]          Niskanen, William, Bureaucracy and Representative Government (Chicago:  Aldine, Atherton, 1971).