Sri Lanka’s telecom revolution

For many developing countries, inadequate telephone service is a major obstacle to joining the e-commerce age. Sri Lanka’s experience shows that competition is the key to improving telecom access.

Phones literally mean business in the e-commerce age, but in developing countries just getting connected can be a nightmare, with interminable waiting lists running into several years for service from a monopoly state provider. Anxious not to be left behind, many governments in the developing world have embarked on telecommunications reform in the hope of rapidly making phone services available to the entire population.

Generally, this has involved separating the actual job of operating the phone service from policy and regulation; at least partial privatisation of telecommunications services; the introduction of competition; and the establishment of regulatory agencies to provide safeguards for competition and consumers.

Private investment in telecommunications has increased significantly and there has been an unprecedented expansion of connectivity. Access is still concentrated in urban areas and among the relatively wealthy, but is also reaching previously excluded groups. Mobile phone services using prepaid cards, for instance, are helping those without a fixed address to get connected (see article by Joanne Taaffe in the Economy section).

If ever there was need for an example of how reform can improve performance, then Sri Lanka has to be it. This small country’s experiences in telecom reform show that competition is above all else the key to improving telecom access. Without it, poorly staffed regulatory agencies have trouble surviving, let alone actively fostering competition and protecting consumers from threats to their independence by politicians and bureaucrats trying to claw back power.

But when competition is added to the mix, the incumbent operators come under pressure to tackle inefficiency, waste and corruption, or face losing their customers. Governments tend to toe the line too, anxious as they are to see their policies succeed. If governments falter, competitors with businesses and money at stake will exert pressure to prevent the rollback of reforms that made their existence possible. And customers can exercise their prerogative of choice and refuse to accept poor service.

A decade of sweeping reforms has transformed Sri Lanka’s telecom landscape. The level of fixed phone access multiplied almost fivefold, with the teledensity (the number of fixed line phones per 100 people), rising from 0.73 in 1991, at the start of the serious reforms, to 3.64 by the end of 1999. Mobile teledensity increased from 0.01 in 1991 to 1.22 by the end of 1999, according to International Telecommunication Union figures.

The levels may still be low compared with an industrial country such as the United States, where there are 66 fixed phones for every 100 people (see Databank). But for a small country of just 19 million people, these changes are tantamount to a communications revolution. And compared with neighbouring India, for example, Sri Lanka is doing well; India had around 2.66 fixed phones per 100 people at the end of 1999, and 0.19 mobile phones.

Sri Lanka’s first private operating licence was granted in 1989 to a mobile operator and by 1995 four mobile operators were engaged in vigorous competition. Today, eight operators, including the partially privatised state operator, Sri Lanka Telecom Ltd. (SLTL), are licensed to provide data communication services using their own facilities. Additional operators continue to be licensed to provide services, including Internet, on the basis of leased facilities. Five paging operators, a trunk-radio operator offering a closed user group mobile phone system for commercial operators, a specialised infrastructure provider and two payphone operators have also been licensed.

Softly does it

This gradual approach, beginning with competition at what were then the margins of the sector, was the result of a traumatic experience in 1988-89, when trade union unrest forced the government to retreat from a long-planned partial privatisation and opt instead for converting the state monopoly into a corporate entity. The privatisation experience made the government cautious early on. While various policy pronouncements were made about the number of licences that would be issued in 1989, for example, no formal guarantees were given to any operator as to the level of competition they would face. As a result, the incumbent operator at the time did not feel the pressure. Growth in fixed line access remained slow as a result. The annual average growth rate of new lines was 15% for 1992-95, which was not enough to reduce waiting lists, and consumers became impatient.

All that was to change dramatically in 1996 when the government introduced direct competition, by granting two fixed-access licences. This was competition where it mattered most, even if the new operators were able to install only a small number of fixed lines that year. In August 1997, the government sold 35% of the operator to NTT Corporation, the government-controlled incumbent in Japan, for US$225 million and signed a management agreement with them. A further 3.5% stake went to the Sri Lankan operator’s employees. The internal organisation of the company was radically changed and the growth rate in supplying new lines soared.

In 1996-99 the annual growth rate in the supply of new lines more than doubled to 32%. Chronic under-utilisation of capacity has been eliminated, serious efforts are being made to improve customer relations, and the opportunities for petty corruption that was endemic in the old order have been reduced.

An attribute of good competition policy is that it can reinforce the regulatory regime. The Sri Lankan government separated regulatory functions from operations in 1991, but the regulatory body remained a government department lacking resources and qualified personnel. In 1996, when the fixed-line operating licenses were awarded, the regulatory authority was given the resources to build up the necessary expertise and a degree of independence. It recruited new personnel and launched a series of initiatives, including fixed and mobile interconnection proceedings.

This established a sound foundation for competition, and resulted in the first public hearing on the improvement of billing, and the first successful order against the incumbent for violation of licence conditions. The incumbent operator appealed against one of the interconnection decisions, and for the first time the appeal went to the courts, not to the political and administrative authorities as in the past. The incumbent lost the case – small but compelling evidence that competition helps ensure that regulatory and judicial systems operate effectively.

Nonetheless, the fact remains that Sri Lanka’s fledgling regulatory agency, the Telecommunications Regulatory Commission, is not quite up to the full task of reform yet. Its staff is for the most part under-skilled and underpaid and there is still some ambiguity about its relationship to government. The courts have commented on “threats” to its effectiveness, possibly caused by lack of independence from Sri Lanka Telecom and its majority owner, the finance ministry. To be effective, the regulatory agency must build up its independence, expertise and its confidence. Hopefully, in Sri Lanka and elsewhere, the result will be not only a growing telecom industry, but a well-regulated one as well.

Reference 

• OECD, Mobile Phones: Pricing Structures and Trends, 2000. 

©OECD Observer No 224, January 2001 




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