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This article highlights the importance of open access
regulation in the digital economy and discusses the key
issues to be addressed by regulators, especially in developing
countries. Different regulatory approaches are illustrated
looking at the different layers of the Open Systems
Interconnection (OSI) model, including Australia’s
public funding of its new national broadband network,
Mozambique’s infrastructure-sharing regulations, Singapore’s
structural and operational separation, and the
steps being taken in a number of African countries to
ensure open access to international submarine cables.
What is open access?
Open access is “the possibility for third parties to use an
existing network infrastructure”, according to the Best Practice
Guidelines for Enabling Open Access, adopted by the 2010
Global Symposium for Regulators. Other definitions exist, each
implying a different extent of openness. But there seems to be
agreement that open access applies to infrastructure, and means
that all suppliers are able to obtain access to network facilities
on equal terms. The regulatory model and the conditions of access
will vary, but open access is paramount if the new digital
economy is not to fall back into monopoly.
In many countries, public ownership of telecommunication
networks was instituted specifically to enable the large-scale investment
in networks needed to provide affordable, ubiquitous
telecommunication services. The market liberalization of the past
15–20 years has been achieved by facilitating open access to
incumbents’ networks while encouraging the parallel growth of
mobile networks. So successful has this strategy been that the
former monopolies — now largely privatized — have lost more
than half their market share in many countries and have seen
traffic growth diverted to mobile and other platforms. The picture
is similar in the developed and developing world (see Figure 1).
Legacy networks cannot keep pace with the growth of
bandwidth-hungry applications. Huge investment is needed. The
benefits of competition are evident, but some new regulatory
thinking is now required for a successful transition to the digital
economy.
A number of countries (Australia, Qatar, Malaysia and
Singapore, among others) have embarked on the creation of
entirely new national broadband networks, deploying fibre-optic
technology throughout the core network and, crucially, in the
access networks that reach out to the end users. Investments
in these networks are huge (Australia’s network, for example,
is costing USD 45 billion) and this has led some countries to
re-nationalize infrastructure so as to benefit from economies of
scale and preferential borrowing rates.
Other countries (for example in Europe) are trying to find
ways to improve investment incentives for network operators,
while maintaining competitive supply. This involves removing
some of the regulatory layers that have built up around dominant
operators (operators with significant market power) to support
or reward the development of ubiquitous broadband networks.
Developing countries such as Tanzania and Mozambique
lack not only the public funds for full national broadband networks,
but also fixed-network infrastructure. These countries
are therefore pursuing hybrid solutions, which typically involve
public investment (generally low-interest and loan-funded) in a
fibre-backbone network, coupled with various forms of support
and encouragement for privately funded access networks using a
range of technologies.
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Infrastructure-sharing regulations in Mozambique
Regulated open access is often limited in scope to passive
infrastructure (ducts, poles, towers, exchanges and so on). The
infrastructure-sharing regulations in Mozambique provide a typical
example.
In December 2010, the regulatory authority in Mozambique
published infrastructure-sharing rules that require all network
operators to provide open access to passive infrastructure. The
basic requirement is to publish a reference sharing offer and then
negotiate individual sharing agreements with requesting licensees.
There are also stipulations concerning capacity and quality
of service, to ensure equal treatment for all operators. Pricing is
to be fair and reasonable, and based on defined costing principles.
Existing operators are required to take into account the
needs of new entrants, for example by building capacity.
Open access is critical for national broadband networks
Open access is essential in the case of publicly funded national
broadband networks, and generally required wherever
there is the likelihood of economic bottlenecks preventing competitive
supply. However, if the regulations offer sufficient incentive
to encourage infrastructure investment, and if open access
exists at the lower layers of the Open Systems Interconnection
(OSI) model, as shown in Figure 2, then the importance of requiring
open access decreases moving up the layers.
Recent work on open access in the European Union has focused
on the need to ensure fair and transparent access to broadband
network infrastructure. The European Regulators Group
(BEREC) has observed the use of the term open access in the
context of “facilitating broadband roll-out, particularly in relation
to the roll-out of next-generation access (NGA) networks”
and “in relation to the provision of additional current-generation
broadband services in under-served areas”.
There is an emerging regulatory consensus that there should
be open access to national broadband infrastructure. Even in
highly developed markets, the scale and scope of investment
required for broadband networks tends to create a dominant
provider. Fibre access pipes represent an essential utility, and
— except in densely populated areas — duplicating that infrastructure
is neither commercially nor economically viable.
A monopoly on infrastructure, particularly in rural areas
and developing countries, seems sensible. Regulatory action for
broadband networks should therefore focus on ensuring access
on fair, reasonable and non-discriminatory terms, rather than on
encouraging infrastructure competition.
Open access needs investment incentives
Open access is especially important where broadband and
next-generation access roll-out is supported by public funding.
In such circumstances, mandated open access can promote network
investment, prevent the uneconomic duplication of facilities,
and strengthen competition.
Under European State Aid rules, the provision of public funding
to broadband infrastructure projects is dependent on a commitment
to open access. The related guidelines consider open
access to mean effective, transparent and non-discriminatory
wholesale access to the subsidized network. In addition to open
access obligations, the conditions for receiving aid include detailed
mapping of private infrastructure, open tender processes,
technological neutrality and claw-back mechanisms. These
safeguards aim to promote competition and avoid crowding out
private investment, while fostering the wide and rapid roll-out of
broadband networks.
Infrastructure sharing can be the basis for the competitive
supply of services, provided that rival service providers all enjoy
the same terms and conditions of access. Substantial regulatory
effort is now being made to mandate open access to passive infrastructure
as shown in the table.
Open access is not always the right regulatory tool
If private capital cannot provide all the required investment,
then investors (including the State) need support, and this has
to be balanced against the desire for open access. In contrast,
where a competitive market develops, the only regulatory interventions
that are required concern competition, for example, to
prevent anti-competitive mergers or acquisitions, or to prevent
collusion. Between these two extremes, the need for regulatory
intervention requires analysis and judgement.
Broadband service delivery constitutes a complex value
chain, and competition may be facilitated at higher levels by a
single provider being subjected to open access arrangements at
lower levels. Regulators ought therefore to start their analysis at
the lowest network layer, implement open access remedies as required,
and then work up the layers, taking account of the likely
impact of the remedies introduced in the lower layers.
Policy and regulatory tools
Open access is most effective in layer 1 of the model presented
in Figure 2. Regulatory requirements at this layer can obviate
the need for open access regulation at higher layers.
Many of the policy and regulatory tools for open access have
already been deployed, and a range of regulatory remedies is
available to curb anti-competitive practices. This is typified by
the EU regulatory framework, which has been copied and modifi
ed in many other countries. In increasing order of severity, the
remedies consist of:
transparency, including the provision of a reference offer; non-discrimination, requiring the use of equivalent conditions
in equivalent circumstances; obligations to provide access, specifically applied to unbundled
facilities including the local loop, and the requirement
to offer co-location; price controls, which may include limits to cost recovery
based on specific costing methods; cost accounting obligations, including the requirement
for external audit and the annual submission of separated
accounts.
Such remedies support open access and facilitate service
competition. This is especially important in developing countries,
where low demand and limited supply options heighten
the need for open access. Infrastructure-sharing regulations in
Mozambique provide an example of effective regulation based
on these remedies.
Adapting policy and regulatory tools for the digital era
The major difficulty facing rival suppliers of retail broadband
services is access to the customer. The standard regulatory response
covers unbundled local loops and bit-stream access,
coupled with backhaul facilities from the local exchange to the
operator’s point of presence.
Regulatory economists talk of a “ladder of investment” that
service suppliers seeking access to customers ascend one rung at
a time. Suppliers first take bit-stream plus backhaul. Then they
build their own backbone infrastructure, so they no longer require
the backhaul service. Then they deploy their own cables to
the local exchange where, using co-location, they provide their
own electronics, and they purchase just the unbundled local loop.
They may even become wholesale providers, thereby improving
their network usage levels and overall return on investment.
This is all well and good, but the regulatory arrangements
may favour asymmetric digital subscriber line (ADSL) to the extent
that it creates a barrier to moving on to fibre. This is especially
true of unbundled local loops, where the point of co-location
is often located within the boundaries of the copper network.
The dominant operator’s ability to upgrade to next-generation
access technology may be restricted, or the rival operator may be
obliged to roll out more infrastructure in order to retain its existing
customer base. Some regulators (for example in
Hong Kong, China) are withdrawing from unbundled
local loops for precisely this reason.
Open access may discourage private investment.
It is therefore no surprise that some governments
make their own investments (for example in
New Zealand and Australia) or provide soft loans to
a generally compliant private sector (for example in
the Republic of Korea and Japan). Developing countries
cannot afford such approaches, so they need to
establish greater investment incentives and rewards
through the pricing arrangements associated with
open access.
* * The GSR discussion paper on open access regulation in the
digital economy, on which this article is based, was written by
M. Rogerson, Director, Incyte Consulting Ltd.
Tanzania
Regulatory measures for future technologies
Bowing to economic reality, regulators may have to accept monopoly
as a way of providing open access to passive infrastructure,
although they can cut a fairer deal on pricing, to reflect the
real cost of investing in infrastructure — one such arrangement
exists in Tanzania. There should be a time-limit on the open access
agreement, and designated review points along the way
that allow the regulator to change the terms if necessary.
Managing the National ICT Broadband Backbone in Tanzania
With loans from the Chinese Government, Tanzania embarked,
in 2009, on creating a USD 200 million National ICT
Broadband Backbone. This involves rolling out 7000 km of national
fibre backbone in four rings — north, south and west, plus
metropolitan Dar es Salaam. The backbone provides a fibre-optic
network, which is being managed and operated to provide highspeed
broadband capability throughout the country at affordable
prices. The national backbone also connects with the international
submarine cables (SEACOM and EASSy) in Dar es Salaam,
and provides land connectivity to Tanzania’s neighbours.
The national fixed-network incumbent, TTCL, manages the
backbone on an open access basis. All service providers have
the right to use this capacity and all (including TTCL) are supplied
on the same basis. TTCL retains a management fee, which
is determined on the basis of the utility-level cost of capital and
a government-determined cost-recovery period. Transparency in
the management and operation of the backbone is assured by:
accounting separation — the accounts for backbone operation
revenues, expenses and capital costs kept separately
from the accounts for TTCL’s other business operations; independent audit of backbone operation accounts; publication of backbone operation accounts and of the auditor’s
certificate; equal access, under the same terms and conditions of use,
for all backbone wholesale customers, including TTCL; preparation of a backbone reference offer from TTCL setting
out the terms and conditions for access and use of the
backbone facility and services, applicable to all wholesale
customers; publication of the arrangements and processes to ensure the
commercial confidentiality of backbone customer information
and transactions.
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Singapore
National broadband network in Singapore
Singapore provides an example of extensive government activity
and funding to develop next generation access networks, with
the ultimate aim of providing high-speed broadband for all. A
significant degree of separation is needed between industry
participants to ensure that downstream operators have effective
open access to the infrastructure. After extensive consultation,
this separation has taken the form shown in the chart.
The supply structure is based on:
operational separation between retail service providers and OpCo (wholesaler); structural separation between OpCo and NetCo (fibre network); structural separation between underlying infrastructure ownership (AssetCo) and management of the fibre network (NetCo).
At the core of the structure, NetCo (owned by a consortium
comprising SingTel, AXIA, SPH and SPT) is responsible for the
design, building and management of passive infrastructure. In
order to make available the promised speed of 100 Mbit/s to
1 Gbit/s, NetCo has to roll out a new fibre-optic network to all
Singapore households, using the existing passive infrastructure
owned by AssetCo.
OpCo (totally owned by StarHub, but operationally separated
from StarHub’s other activities) is responsible for the management
of active equipment. OpCo provides wholesale network
services to retail service providers, which in turn provide service
to retail customers.
To achieve its broadband vision, the government has funded
28 per cent of the investment in OpCo and 36 per cent of the
investment in NetCo. The balance — more than USD 1.4 billion
— will come from the private sector. The tender process for both
NetCo and OpCo included a
funding requirement as part of
the selection criteria.
Singapore has opted for
structural and ownership separation
to ensure non-discriminatory
access to essential passive
infrastructure facilities. The
Singaporean regulator appears
to have concluded that providing
the passive infrastructure
needed for the roll-out of high
speed broadband access is not
prospectively competitive and
could create a bottleneck in the market. By separating ownership
of these facilities from all market players (including SingTel), the
approach removes the downside of vertical integration, though it
is not clear at what operational cost to SingTel this was achieved.
As a small and affluent island State, Singapore is not a template
for providing services to rural areas. Nevertheless, New
Zealand has recently opted for
structural separation, and there
is no reason why the approach
should not work elsewhere.
The Singapore case raises
some interesting points. One
is that, even in an affluent city
State where operational circumstances
(high proportion
of multi-dwelling blocks) are
favourable, significant government
funding is needed. This
suggests that government
funding may be needed in most
countries. Another point is that the market may be satisfied with
current speeds or unwilling to pay a premium for a faster service.
This poses a significant market risk to both government and
private investors. Also, if AssetCo is entrenched as a long-term
monopoly, this may jeopardize efficiency, customer orientation
and innovation.
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| Photo credit: AFP |
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The ACE project
Open access to Africa Coast to Europe (ACE) submarine cable
ACE is a submarine cable system for West Africa, with landing
stations in 20 countries stretching from France to South Africa. In
each of these countries a terminal party is established to operate
the cable landing facility, and to own and maintain the cable segments
within the national territory. The terminal party comprises
one or more landing parties, each of which makes a designated
minimum investment in the ACE landing point for that country.
This investment depends on the number of investors and ranges
between USD 25 million and 50 million. Generally, a special purpose
vehicle (SPV) has been established to act as the terminal
party, and investment in the SPV may come from a number of
sources, including operators, governments and international
development agencies. For example, the SPV in Sao Tome and
Principe is a limited company jointly owned by the government
and the incumbent operator, and into which the government
channels funds for the ACE project which originate from the
International Bank for Reconstruction and Development.
SPVs have privileged access to international capacity, and
sometimes an effective monopoly — especially where there is
no other international access via undersea cable, and where
satellite access is both expensive and limited in capacity. This
gives the SPV significant market power, with the potential to
act independently of rivals and contrary to consumer interests.
National authorities therefore need to regulate SPVs (the West
African Telecommunications Regulatory Authority has published
guidelines for this purpose).
In Liberia, the regulator has recently commissioned a project to:
identify the market for the international capacity provided by ACE; determine whether the Cable Consortium of Liberia (the terminal party for ACE) has significant power in this market; introduce regulations to ensure open access to the facilities of the Cable Consortium of Liberia and hence to the ACE cable,
in a manner that both adequately rewards investors and ensures effective competition in international services.
This approach follows the EU regulatory framework and is
an example of how regulators in developing countries can adapt
best practice regulation from elsewhere to fit their circumstances.
One of the challenges faced by the Liberian Telecommunications
Authority, and other regulators in similar positions, is
to gauge future demand for the new facility. Identifying total cost
is relatively straightforward: capital expenditure — depreciated
over the 20-year lifetime of the cable — plus a return on investment
and operating expenditure. To set prices, however, the total
cost must be divided by some measure of demand. The difficulty
is that demand is unpredictable, and may grow rapidly. Prices
based on short-term forecasts will be too high and may stunt
future growth of demand. Prices based on longer-term forecasts
will initially be below cost, and the SPV’s investment will not be
recovered if the forecasts prove over-optimistic. Appropriate arrangements
are therefore likely to involve a price cap, with an
annual review that allows for any under- or over-recovery of investment
to be to carried forward and influence the following
year’s prices.
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