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| Sunday, 2 January 2005 |
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Telecom regulator should regulate Prof. Rohan Samarajeewa has sent the following response to the article with the above title published in the Sunday Observer of December 12, 2004. An article in the Sunday Observer of December 12th, 2004 based on data and analysis supplied by K. K. Gunawardene, former Director of the Department of Telecommunications, claims that the telecom reforms implemented in the past seven years have been a failure. Gunawardene's claim is based on the reduction of call volumes per line between 1999 and 2002 by 6%. He presents tabular data from the United Kingdom from 1997 to 2002 showing that in that country use per line increased while prices decreased, claiming that declining volumes per line here were caused by increasing prices. The fundamental error is that he is comparing a putrid apple to a healthy orange. The Sri Lankan telecom system that he spent his entire career in was one that was wracked by pent up demand, distorted prices and corruption. The mature and normal system, which is not subject to distortions of this magnitude, cannot be compared to ours. In the pre-reform days, people had to get Directors' preferences, Ministers' preferences and even show medical certificates in some cases to get a new telephone connection. Waiting periods were measured in years and decades. In such circumstances, it was natural for the existing lines to exhibit very high use. Under conditions of highly constrained supply, even private phones will tend to exhibit use patterns similar to public (or pay) phones as friends and neighbours use the few available phones. In the bad old days, many official phones served as free, common-use phones for employees and were rarely on-hook during office hours. It is obvious to an unbiased observer that these abnormal use patterns would change as more telephone connections were provided. In fact, in the single year 1998 SLTL alone provided more new connections than the total connections that existed under the Department of Telecommunications. In less than 10 years and under difficult circumstances, Suntel and Lanka Bell have managed to connect almost as many subscribers as the Department of Telecommunications connected in over 100 years of monopoly provision. With this kind of growth (consistently among the top ten in the world in the period under discussion) what would have been surprising is if use per line did not decline. The other side of the argument is the claim that prices increased in Sri Lanka and declined in the UK. Its no news to anyone who lived here during that period that telephone tariffs increased. That was because the regulator issued decisions almost every year since 1997 that permitted Sri Lanka Telecom to charge higher prices. The regulatory agency did this because the then government had entered into a binding legal agreement with NTT, the Japanese company that bought 35% of the shares of SLTL and managed it from 1997 to 2002, to do something called tariff rebalancing. Because only about 40% of the Company's revenues came from the domestic market at that time and the rest came from the international market, the government committed to increase the domestic revenues of the company by 148% over a five-year period (in actual fact, it may have been less because foreign exchange movements and inflation were not factored into the formula). If this commitment was violated, the government could have been taken to international arbitration, according to the legal provisions. And as it was shown in a number of international arbitrations in the past few years, the government would have lost the arbitration and would have been compelled to pay NTT the lost revenues and damages. The investment climate would have been harmed and we may have had to return to the days of begging for loops from the high-ups in Telecom. For all the above reasons, the telecom regulator was correct in raising domestic tariffs. Rate rebalancing is a necessary correction to a grossly distorted price system. Rebalancing removes this perverse incentive. The fact that Sri Lanka now has almost three times as many fixed phones as there existed when the rebalancing started, shows that the theory is right. The low charges for the privileged few that was the order of the day in Gunawardenes time deprived the great majority of people the access to telephones. The new order that recognizes the laws of economics has given more people access to telephones and other services such as the Internet and SMS even at higher and more cost-reflective prices, yielded enormous tax revenues for the government and resulted in the telecom sector being among the most dynamic contributors to the country's economic growth. An individual who personifies the old order of decade-long waiting lists and Directors' preferences criticizing the telecom reforms of 1996-97 is understandable. What is puzzling is how the name and position of a senior member of a constituent party of the UPFA government became an instrument of that criticism. After all, the government that began the privatization of SLTL and entered into the legal agreement that mandated a 148% increase in domestic revenues was the People's Alliance government and not any other; the government's signature on that document is that of Dr P.B. Jayasundera, then Chairman of the Public Enterprise Reform Commission and the current Secretary of Treasury, and no other. While the privatization was not perfect, it was a major reform that took courage and imagination and yielded good results. |
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