TELECOMMUNICATIONS
INDUSTRY
RENATO AGURTO C.
1. INTRODUCTION
This chapter
is primarily oriented toward describing the actions takenin the 1980s aimed
at achieving a successful privatization in the telecommunicationsindustry and
at the influence that this process had on the structuring ofan appropriate regulatory
framework for the industry.
Emphasis will
be placed on public service telecommunications, namelylocal fixed calling and
long distance and international telecommunications,as they constitute the backbone
of Chile's telecommunications network.
The first
portion of the chapter provides a brief historical overviewof the physical,
institutional and legislative development of Chile's telecommunicationsindustry.
It is important to note that, as with all services exhibitingthe general characteristics
of a natural monopoly, the industry's developmenthas been influenced by the
type of regulations implemented. This sectionconcludes with a summary of the
primary problems the industry faced in themid 1980s.
The second
section describes the measures taken to adjust the regulatoryframework, with
an emphasis on those which the reformers believed wouldbolster economic efficiency
in the industry's development.
Thirdly, a
description is provided of the most important measures takentoward the end of
the 1980s to pave the way for the full privatization oftelecommunications in
Chile.
Lastly, the
current status of telecommunications in Chile and perspectivesfor future are
presented along with a discussion of some of the problemsand salient issues
facing the industry.
II. HISTORICAL
OVERVIEW
1. SUMMARY
OF PHYSICAL AND INSTITUTIONAL DEVELOPMENT
a. Evolution
of companies in the industry
The evolution
of telephone service in Chile was similar to that of therest of the world; it
emerged as of 1880 through a number of local companieswhich were subsequently
consolidated, as of 1930, into a single large companyknown as the Chilean Telephone
Company or CTC. The CTC was actually ownedby the U.S.-based firm International
Telephone and Telegraph (ITT). Thus,leading companies around the world included
American Telephone and Telegraph(ATT) in the United States, Siemes in Germany,
Ericsson in Sweden, Argentina,Mexico, etc. and ITT in Spain, Brazil, Argentina,
Peru, Cuba, Mexico andother nations in addition to Chile.
As we shall
see upon examining the existing legislation, as of 1930 Chileconceded development
of this capital-intensive field -- which was, moreoversusceptible to important
technological changes -- to a foreign company withexperience and resources.
Through the purchase and merging of local firms,the Chilean Telephone Company
came to cover some 95% of Chilean phone service.It is important to note that
the expansion of the CTC in order to fulfillobjectives established in the legislation
which created the firm were madein an environment of increasing State intervention
in the nation's economy.This served as a progressive disincentive for the industry's
developmentand caused a serious deficit in the availability of phone services.
Thisprocess culminated with the intervention of the company by the State in1971.
The CTC's
coverage is nationwide, except for the 10th Region (locatedin Southern Chile)
where the local National Telephone Company of Valdivia-- established in 1894
-- has remained in private hands except for a briefperiod of State intervention
between 1971 and 1982 and the AysénRegion, which is serviced by the Coyhaique
Telephone Company, a former municipalfirm that was privatized in 1982.
The growing
participation of the State in the development of telecommunicationsin Chile
reached its zenith in the early 1960s with the creation of theNational Telecommunications
Company (ENTEL) which was charged with the exclusivedevelopment of long distance
and international telecommunications services.
Even after
the State had achieved full control over the nation's telecommunications,the
statist view of the industry persisted for many years, based on a multiplicityof
justifications: governmental and administrative needs; emergency reasons;security;
national defense; etc.
In 1981, two
new local phone companies emerged, CMET and the ManquehueTelephone Company which
helped to alleviate the phone line deficit in areasof Santiago and the 5th Region
where demand was greatest.
The national
telegraph and telex services, moreover, were transformedinto a legal monopoly
under State control in 1960 through formation of theState Mail and Telegraph
Service.
b. Regulatory
Entities
From the perspective
of regulator entities, the industry's institutionswere characterized by the
initial creation (in 1925) of a general organism,known as the General Directorate
for Electrical Services. This service wassubsequently transformed into the Superintendency
for Electrical Services,Natural Gas and Telecommunications (SEGTEL). Nonetheless,
for the first40 years, the CTC was controlled directly by the government through
3 representativeson its Board of Directors, including the General Director of
Services, NaturalGas and Telecommunications. It was not until 1971 that regulation
of theCTC was completely transferred to SEGTEL.
As of 1978,
responsibility for regulating the telecommunications industrywas shifted to
the Undersecretariate for Telecommunications (SUBTEL), aninstitution subordinated
to the Ministry of Transportation and Telecommunications.
c. Evolution
of physical and economic indicators
In an effort
to better understand the physical evolution of the telecommunicationsindustry
in Chile, a set of charts is presented below which reflect thephysical and economic
indicators relating to local telephone service andthe development of long distance
and international calling. These chartsmake the effects of the telecommunications
polices implemented in the 1980sclear and illustrate the impact of the privatizations
conducted toward theend of that decade which will be commented upon in greater
detail in a moment.
In terms of
growth in the number of available telephone lines, Chart1 shows moderate growth
with annual rates of 6.4% for the period 1960-1967;9.1% for the period 1967-1972;
3.2% between 1972 and 1980; 7% from 1980through 1985; and 5.4% between 1985
and 1988. In 1989 and 1990, the growthrate jumped to 9.2% and 25.7%, respectively.
From a broader perspective,the average growth rate for the period 1960-1980
totaled 5.8% and 6.4% between1980 and 1988. This chart also shows the increase
in demand as expressedthrough the number of pending requests for phone lines.
However, it is importantto note that these figures do not always represent the
totality of unsatisfieddemand.
CHART 1
DEVELOPMENT OF LINES IN CTC AREAS
(Through Dec.
of each Yr.)
CHART 2
PHONE DENSITY
IN CTC AREA
As a result
of the course of phone line development, the country slowlyachieved the densities
shown in Chart 2, expressed in the number of linesinstalled per 100 inhabitants
and in phones per 100 inhabitants.
CHART 3
INT'L PHONE DENSITY
(lines in service
per 100 inhab.)
Chart 3 seeks
to compare Chile with prevailing international conditionsin terms of telephone
density in lines per 100 inhabitants for a varietyof developed and developing
countries as well as the world average. Thischart shows that despite the tremendous
expansion in telephone availabilityin Chile in recent years, by the end of 1990
Chile was still below the worldaverage in per capita telephone density.
Chart 4 reflects
the degree of automation and digitalization of the CTC'sswitchboards. As can
be clearly seen, at present close to 100% of linesare handled through automatic
switchboards; for 65% of those lines automationis digital (this figure has been
achieved over the last 8 years).
CHART 4
LEVEL OF AUTOMAZATION & DIGITALIZATION IN CTC AREA (%)
Chart 5 shows
the annual number of domestic long distance calls. Growthin this field over
the last decade has been noteworthy, reaching an annualaverage rate of 15.1%.
Furthermore, growth during the period 1984-1990 wasparticularly strong, with
an average annual rate of 18.5%. For the period1960-1980, the average annual
growth rate in long distance calling was 7.1%.In terms of the equipment utilized
in the long distance network, Chart 6provides information on the number of circuits
used by the CTC's long distanceservices including both wholly-owned and rented
equipment (the latter belongsprimarily to ENTEL). Considerable growth in the
number of circuits utilizedtook place in the 1980s, with an annual average rate
of 11.2% as comparedto rates for the two previous decades in which growth averaged
just 6.1%per year.
CHART 5
LONG DISTANCE
CALLING IN CTC AREA
CHART 6
DOMESTIC LONG DIST. CIRCUITS
Chart 7 provides
data on international phone calling for the period 1977-1990.Growth in international
traffic was particularly strong in the period 1985-1990.Furthermore, the number
of available international circuits, belonging toENTEL, is reflected in Chart
8.
CHART 7
INT'L PHONE TRAFFIC
CHART 8
INT'L CIRCUITS
(Satelite &
Microwave)
In terms of
the evolution of economic indicators in this industry, Charts9 and 10 show financial
data for the CTC and ENTEL based on informationcontained in the annual reports
filed by the two companies. From this information,the deterioration in economic
conditions of the early 1970s and the recoveryfollowing 1975 become clear. Moreover,
it is apparent that ENTEL's performanceconsistently bettered that of the CTC.
This is probably due to distortionsin the tariff regulations -- a subject which
will be discussed in a moment-- affecting these companies.
CHART 9
CTC FINANCIAL
INDICATORS
CHART 10
ENTEL FINANCIAL
INDICATORS
Chart 11 reflects
two indicators which have been developed in order tobetter understand the average
tariffs charged by the CTC in the 1980s. Thesefees include the average monthly
per line revenue generated by urban service(fixed and variable rate local service
and equipment rental) as well aslong distance services. This data shows a slight
trend for revenue fromlong distance services to drop as income from local calling
rises and viceversa. This is most likely an effect of corrections and accentuation
inthe subsidy between long distance and local calling rates.
CHART 11
MONTHLY REVENUE PER AVERAGE LINE IN SERVICE
(Dec. 1990 pesos)
2. SUMMARY
OF REGULATORY DEVELOPMENT IN THE CHILEAN TELECOMMUNICATIONSINDUSTRY AND THE
CORRELATION WITH PHYSICAL DEVELOPMENT
As occurred
with electrical services, the first regulations on telecommunicationsin Chile
were contained in the general legislation applying to electricalservices passed
in 1925. From that date forward, the development of pertinentregulations was
as follows:
a. Era
of regulated monopoly with guaranteed profitability
From a general
perspective, during this period telecommunications serviceswere regulated on
the precept that rates should cover operational expensesand a pre-determined
level of profitability on the companies fixed assets.This criteria was maintained
in the legislation of 1925, 1931 and 1959 coveringtelecommunications.
However, the
largest developments in telephone services came as a resultof special legislation
and contracts. For example, the Contract Law of 1930resulted in the formation
of the CTC and the ad referendum agreementsof 1958 and 1967 were signed
between the government of Chile and the CTC.Some of the noteworthy aspects of
the Contract Law of 1930 include:
- Broad, although
not exclusive, concession to develop telephone servicethroughout the entire
country; concessionaires were required to providetelephone services and construct
a basic telecommunications network to integratethe nation.
- Tremendous
freedom to introduce new technology and, in general, toallocate resources.
- Extensive
freedom to establish purchasing or installation usage agreementswith other companies
and establish contracts with international operators.
- Minimal
governmental authorization was required to develop service(general installation
plans required governmental approval in an effortto accelerate the achievement
of goals established in the contract). Accessto public goods, governmental properties
and other areas were facilitated.The State, moreover, was granted power to expand
that access.
- Stipulations
that foreign companies transfer know-how to Chileans throughemployee and worker
training in telephones and phone service.
- Specifications
that required companies, upon increasing their capital,to disseminate its property
among the largest possible number of domesticinvestors.
The Contract
Law also applied regulations based on accounting criteriato tariffs; covering
costs and ensuring a profitability of up to 10% overnet investment. Nonetheless,
cost allocation criteria between the differentservices were not spelled out
(e.g. between local and long distance calling).This, combined with the fact
that tariffs had to be approved in advanceby governmental officials -- despite
the adjustability of rates in goldpesos -- and the overall statist, politicized
environment, meant that inherentsubsidies were produced which resulted in the
transfer of funds betweenlong distance and local calling. The presence of this
subsidy naturallyserved as a disincentive to the development of improved local
telephoneservice. The result was a chronic deficit in local service -- which
hasonly recently begun to be overcome -- and a strong incentive to invest inlong
distance service.
In summary,
despite the stipulations contained in the Contract Law of1930 aimed at ensuring
the quick development of the telecommunications industryin private hands, the
lack of resolution within the government, the increasinglystatist system and
the influence of politics on the setting of phone rates-- combined with murky
regulatory conditions -- made the implementationof the legislation difficult,
served as a disincentive to the CTC and contributedto the continued transfer
of these services to the State.
The agreements
of 1958 and 1967 sought to stimulate the development oftelephone services which
had been interrupted as a result of prevailingconditions. Of particular importance
for the purposes of this chapter isthe agreement of 1967 through which the State
intervened widely in the propertiesheld by the CTC and in the configuration
of the State long distance monopolythrough the recently created ENTEL. In essence,
this agreement reduced theparticipation of ITT in Chile to 51% of the CTC through
a forced capitalizationby CORFO of the revenue necessary to implement the firm's
expansion plans.In terms of the primary long distance network, the agreements
limited CTCexpansion in this field with the exception of the microwave circuitry
thecompany had installed between Santiago and Valparaíso. Furthermore,restrictions
were imposed on the CTC's access to existing primary networksand the firm was
required to make use of secondary lines. This restrictioncame as a result of
the National Telecommunications Policy which was includedin the 1967 agreement
and stated:
"The
government of Chile believes that it is necessary for basicmeans of domestic
and international communications to be present in thecountry. These means should
be constructed in accordance with modern techniqueswhich grant residents all
types of access to these advances.
The domain
and regulation of these basic means shall be in the handsof the State as a result
of, among other reasons, the needs of governmentand administration, and on the
grounds of emergencies, security and nationaldefense as well as the urgency
of promoting development in the most backwardareas of the country and ensuring
efficient telecommunications servicesat the national and international levels."
In early 1973,
following the intervention of the CTC, the Contract Lawof 1930 was repealed
and control of telecommunications defaulted back tothe general norm, DFL 4 of
1959. The tariff regulations contained in thatlegislation were similar to those
of the Contract Law.
b. Era
of the liberalization of services
In 1978 a
new National Policy on Telecommunications was issued which,in its most relevant
aspects, called for the development of telecommunicationsservices to be conducted
by private institutions through concessions, authorizations,permits and licenses
granted by the State. Nonetheless, the policy endorseda series of regulations
aimed at establishing increased technical controlover such investments and conferring
certain discretionary powers on thegovernment.
This policy
was formalized through the General Law on Telecommunicationsapproved in 1982,
in which free, non-discriminatory access was granted toprivate firms in the
development of the nation's telecommunications services.Moreover, this legislation
called for technical control over the developmentof these activities to be exercised
through authorizations granted by SUBTEL.
In terms of
the rates for telecommunications services, the legislationestablished general
freedom while reserving the justify for the authoritiesto set tariffs should monopolies
surface. Nonetheless, the law failed toestablish criteria, procedures and explicit
time limits for this type ofregulation.
3. FIRST
STEPS TOWARD PRIVATIZATION
a. Reorganizing
the industry's largest firms
As of 1974,
a "normalization" process was implemented aimedat reorganizing the
two largest State-owned companies, CTC and ENTEL. Thisprocess concluded in 1985
with the privatization of these firms. Measurestaken to achieve this goal included:
- Adaptation
to general norms regulating private firms: private organization,criteria and
control mechanisms were implemented in the management of theState-owned.
- Average
rates were brought into greater alignment, although the largestdistortions remained
unresolved.
- Elimination
of privileges.
- Elimination
of discounts and special rates for the State and dependentorganizations.
- Financial
normalization and the elimination of State contributions.
- Elimination
of State guarantees for domestic and foreign credits.
- Profitability
requirement and distribution of dividends by the firms.
b. Efforts
to decentralize the industry
In the early
1980s, efforts were made to decentralize the telecommunicationsindustry through
the establishment of various subsidiaries throughout thecountry. The concept
behind this policy was that it would be easier to attractcapital to smaller-scale
private phone companies. However, from the perspectiveof the large foreign investors,
this was entirely undesirable. To them,the CTC was already small enough; it
was comparable to local phone networksin some developed countries. Moreover,
the CTC opposed the formation ofsubsidiaries, arguing that this would make it
impossible to achieve economiesof scale. For both of these reasons, the efforts
to privatize the CTC throughdecentralization were unsuccessful.
c. Privatization
of telex services
In 1982, the
State monopoly over domestic telegraph and telex serviceswas repealed and a
private firm, Telex Chile S.A., was created as a subsidiaryof the State Development
Corporation (CORFO) to handle the services takenaway from the state-owned Mail
and Telegraph Service. Subsequently, in 1985,100% of Telex Chile S.A.'s shares
were sold off.
d. Liberalization
of phone justifys
Until 1980,
local telephone services were provided through non-transferablecontracts. That
year, transfers between private owners were authorized andproperty justifys were
recognized through what came to be known as "phonejustifys." This represented
a market solution aimed at distributing thelimited number of lines existing
at that time among those most able to pay.
e. New
telephone companies
Toward the
end of the 1970s, the expansion plans put forth by the CTCsimply could not meet
demand for additional phone lines1.This, combined with the property justifys to
phone lines described above,made it possible for two additional companies, CMET
and Manquehue, to commenceoperations. These companies covered new areas as well
as those in whichtheir services overlapped with the CTC.
III. PRIMARY
MARKET REFORMS OF THE MID 1980s
1. THE
PHONE LINE DEFICIT
The key problem
affecting the telecommunications industry in the 1980swas the tremendous deficit
in the number of available phone lines (unmetdemand totaled some 300,000 lines.)2
This deficithad accumulated over many years and was primarily caused by
the State'sinability to resolve the situation through the CTC. Part of the problemcame
from the fact that the State, logically enough, had allocated its limitedresources
to more pressing social areas and to basic infrastructure, suchas electricity.
Thus, despite a willingness among the public to pay forphone services -- which
would imply that such an enterprise would be highlyprofitable -- the State-run
company was unable to respond.
The options
for resolving this problem lay in bringing private capitalinto the development
of the telecommunications industry or allowing themost important companies,
CTC and ENTEL, to continue expanding indefinitelyas state-run operations. The
latter not only went against the overall economicpolicies being implemented
at the time (aimed at developing productive sectorsand services in accordance
with the precepts of free private initiative)but was also highly impractical.
The CTC and ENTEL would continue to behampered by the State's financial limitations
and by the complexities ofthe budget approval process inherent in all public
spending projects.
It is worth
taking a moment to note in greater detail the approach adoptedin Chile through
which the role of the State was conceived as subsidiaryin both general economic
terms and in the telecommunications industry inparticular. The subsidiary role
of the State should not be understood asthe development by the State of areas
in which the private sector is notactive -- without asking why this is -- but
rather as the effort to removeall obstacles which may be impeding private investment.
In the case of thetelecommunications industry, there were no institutional obstacles
and therewas no doubt that the property itself could be in the hands of the
privatesector. In the mean time, the state-run companies were authorized solelyto
implement those expansion plans which could be financed with the limitedlevels
of indebtedness that the macroeconomic situation permitted the State.Moreover,
as noted earlier, the presence of more pressing needs in socialdevelopment and
infrastructure meant that the telecommunications industrywas relegated to, at
best, second place. Furthermore, any profits generatedby the state-run telecommunications
companies formed part of the State'sgeneral budget and therefore were utilized
to subsidize other areas of developmentrather than being reinvested in the industry
itself.
In addition,
as of 1985, its was clear that the strategic nature of telecommunications--
which in the past had been used as an argument for nationalizing theindustry
and which to a certain extent had been hampering its reprivatization-- need
not be an obstacle to the participation of private capital in theindustry. Thus,
mechanisms were devised whereby in cases of catastrophe,severe domestic convulsion
or foreign war, the State may intervene in telecommunicationsservices. In fact,
this had occurred at an earlier date when the industryhad been in private hands.
Moreover, from a strategic perspective, it waspreferable that the telecommunications
industry be well developed and thiscould only be achieved through the participation
of private capital.
Nonetheless,
the privatization of the CTC and ENTEL required, in additionto the political
will to do so, that certain regulatory problems which werehindering the industry's
development be resolved. Overcoming these problemswas of particular importance
given that their existence could be perceivedby potential investors as future
sources of instability.
2. OVERLAPPING
CONCESSIONS AND CONNECTIVITY
By 1985, the
effort to establish a variety of smaller phone companieswhich would have competed
with the CTC, as per the legislation signed in1982, had collapsed. The negative
experience resulting from the installationof the CMET and Manquehue firms was
partially to blame for this setback(the companies initiated operations during
the recession of 1982-83 whichfurther complicated their economic situation).
More important, however,was the lack of clear regulations on connectivity between
these companiesand the CTC. This legal void led to a multiplicity of lawsuits
among theseparties. A 1985 effort to clarify this situation was not sufficient
to movethe country forward toward the development of decentralized, competitivephone
services.
Nonetheless,
the key reason for the breakdown in the budding new systemwas the monopolistic
nature of local calling which made it impractical andinefficient for a variety
of concessionaires to operate in the same geographicarea.
3. COMPETITION
BETWEEN THE CTC AND ENTEL
An additional
problem in 1985 was the competition between the CTC andENTEL for long distance
services. This problem originated with the creationof ENTEL in 1964 and continues
to exist today. Nonetheless, the most importantpoint of tension between the
two companies arose over the issue of tariffdistortion (which, as noted earlier,
meant that profits from long distancecalling were used to subsidize local service).
These differences were partiallyresolved through the tariff regulations enacted
in 1985 but persists asan on-going of source conflict between the CTC and ENTEL
for reason willreview in a moment.
While the
CTC and ENTEL were still state-run companies during the 1980s,an effort was
made to overcome this competition by having CORFO issue clearinstructions separating
the activities of the two firms. However, despitethe wishes of the majority
shareholder (the State), the problem continuedas a result of the position taken
by minority stockholders and the naturalimpulse of executives at both companies
to expand into the lucrative areaof long distance calling.
4. REGULATORY
INEFFICIENCY
As noted earlier,
an important portion of the problems in the telecommunicationsindustry in the
1980s resulted from regulatory inefficiency. Specifically,two areas -- market
accessibility and pricing -- can be highlighted as beingof particular importance.
Both areas originated from an erroneous analysisof the degree of acceptable
liberalization in basic telephone service andlong distance transmissions. Since
the legislation enacted in 1982 soughtto maximize freedom to develop these services
-- and therefore encouragecompetition -- it failed to establish efficient mechanisms
to regulate prices.
a. Market
accessibility
Although the
legislation passed in 1982 retained the concept of "concessions"granted
by the authorities in order to install and develop public telecommunicationsservices,
it failed to establish any significant requirements for obtainingsuch a concession.
Furthermore, no obligations were imposed on the concessionarywho, by default,
was authorized to discriminate or limit the type of servicesprovided. This situation
was wholly incompatible with the concept of fosteringstrong competition in the
telecommunications market.
Moreover,
the legislation was interpreted in such a fashion that -- unlikestandard concessions
for public services -- government officials were notauthorized to make justifiable
decisions on the approval or rejection ofconcession requests. This could lead
to a proliferation of concessionaires,particularly in commercially attractive
areas. Furthermore, technologicaldevelopments at that time in fixed local calling
were (and continue to be)sufficient to create a natural monopoly. The presence
of such a monopolymade it unwise, from an economic standpoint, for there to
be such a proliferationof services while technological advances meant that all
of the servicesneeded to be interconnected, adding yet another source of conflict
to thedisarray. In fact, controversy over connectivity rose in quantity and
tenorwith the increase in the number of concessionaires. This situation led
officialsto deny concessions to new groups; the new groups responded by suing
thegovernment for what they perceived as their justify to enter the market.
b. Pricing
In principal,
the legislation enacted in 1982 established free pricing.However, the authorities
reserved the justify to regulate tariffs if marketconditions failed to be sufficient
to ensure free competition. Moreover,the legislation did not establish criteria
nor procedures for fixing prices,indicating that these were to be set in accordance
with the "direct,necessary costs of providing services" and at a rate
of return to beestablished by the Ministries of Economics and Transportation
and Telecommunications.
In the absence
of a legal framework for setting prices, government authoritiesopted not to
make formal use of these powers. Nonetheless, the governmentdid continue to
do so informally through the authorization of tariff schedulespresented by the
state-run telecommunications firms. This made it difficultto resolve existing
tariff distortions (namely crossed subsidies from longdistance to local calling
and fees for telephone justifys) in an organizedfashion.
5. ROLE
OF GOVERNMENT OFFICIALS
An additional
problem confronting the telecommunications industry inthe 1980s was the level
of indecisiveness regarding the specific role thatthe corresponding regulatory
agency, SUBTEL, should play. The situationwas further complicated by a lack
of resources at that agency which obstructedits effort to fulfill all but its
minimal duties.
An indication
of the extent of this problem was the degree of regulationSUBTEL sought to impose
on the telecommunications companies. One of theoptions discussed was to have
the regulatory agency organize a central strategyfor domestic telecommunications;
however, the scope of such a plan was notdefined. The need for basic domestic
telecommunications to develop harmoniouslyin accordance with some type of planned
growth was clear. Nonetheless, theindividual company-owned networks conforming
the national system expectedplanning to be decentralized. Clearly, these positions
could not be easilyreconciled. Moreover, if the concept of a planned strategy
meant the establishmentof a global referential framework for the industry, then
such a strategycould only serve as a guideline for the State's action in such
areas astariffs, price transfers among services and the granting of concessions.In
any case, the lack of resources made it impossible to conduct researchon these
issues and influenced future legislation on procedures for engagingin tariff
studies.
In summary,
all of the problems mentioned above tended to transform telecommunications,in
general, into an excessively risky business for investors and reduced,despite
the best intentions of the legislation passed in 1982, interestin opening new
companies or acquiring shares in existing ones.
IV. REASSERTING A TELECOMMUNICATIONS POLICY AND ADJUSTMENTS TO THEREGULATORY FRAMEWORK
1. POLICY
REESTABLISHMENT
By 1985, the
investment needs of the telecommunications industry in Chilereached 1.1 billion
dollars for a 10 year plan for public telephone servicealone. Clearly, the only
way to stave off continued deterioration was toopen the industry up to domestic
and international private capital. Thegovernment therefore decided to reintroduce
development by the private sector,implementing the changes necessary in the
regulatory framework to make thispossible.
In order to
achieve this goal, the general guidelines of telecommunicationspolicy were reinforced
to enhance productivity, assign the State a subsidiaryrole and recognize the
market as an efficient allocator of resources.
Furthermore,
specific policies aimed at resolving the problems arisingfrom the general guidelines
were re-defined to identify those segments ofthe industry with the largest degree
of monopolization and create efficientregulatory mechanisms to control those
segments.
Measures were
also taken to define the subsidiary role of the State.For example, in areas
where developing telecommunications could be justifiedon social grounds even
when private investment did not prove profitable,policies were adopted which
made it possible for the State to encourageinvestment without having to play
a direct role in the implementation ofdevelopment projects or imposing social
obligations on private firms. Inorder to do this, the State granted direct subsidies
which made it worthwhilefor private companies to invest in these areas. One
such program was introducedin rural areas whereby the National Fund for Regional
Development providedthe resources needed to finance a portion of specific investment
projectswhich had been carefully evaluated and selected on the community and
regionallevels.
2. ADJUSTMENTS
TO THE REGULATORY FRAMEWORK, 1985-1987
Adjustments
made to the regulatory framework as of 1985 were primarilyoriented toward:
- Making the
rules of the game more explicit and transparent in termsof access to the marketplace
by different telecommunications services, identifyingobligations and responsibilities
of participants and, in particular, establishingpricing mechanisms.
- Providing
financial mechanisms for telephone companies which wouldenable them to meet
their obligations.
- Specifying
appropriate technical and regulatory controls by the authoritiesin an effort
to stimulate greater growth among different telecommunicationsservices.
It is well
worth looking closely at the General Law on Telecommunicationspassed in 1982
and subsequent modifications to understand the general spiritbehind the law.
This background information is of particular use in analyzingcurrent proposals
for additional changes to existing legislation.
3. THE
MOST PRESSING REFORMS
a. Authorizing
concessions and permits
At the end
of 1985 the clause regulating the granting of concessionsand permits (article
12) was modified to read: "Concessions and permitsmay be granted without
limitation as to their number, type of service orgeographic location; more than
one concession or permit of equal naturemay exist in the same geographic area."
This modification sought toclarify that government officials had the authority
to grant concessionsand permits. Previously, this clause had indicated that
"The grantingof concessions and permits shall not be submitted to restrictions
or limitationsin terms of their number, type of service or geographic location;
more thanone concession or permit for equal types of service may exist in the
samegeographic area." The language contained in the original article wasinterpreted
as meaning that government officials were not authorized toapprove or deny concessions
or permits.
It is important
to note that by retaining the possibility of grantingmore than one concession
or permit in a single geographic area -- insteadof regulating such authorizations
-- special care was taken not to establishlegal monopolies. Such structures
are rarely advantageous, even when theservice in question bear the markings
of a natural monopoly. The purposeof retaining this clause was to make those
holding quasi monopolies understandthat if they failed to develop their services
quickly and satisfactory incertain areas, the authorities could make use of
their option to grant otherconcessions or permits in the same region.
b. Connectivity
regulations
In addition
to improving regulations on concessions, two key reformswere introduced into
the norms controlling connectivity among public telecommunicationsservices.
First, clarification was made that the indemnization paid betweenconcessionaires
was derived from the differences between the benefits andthe cost of the connection.
Prior to the reform, the rule was that the dominantservice (the new concessionary)
was to make payment to the existing concessionary,yet the legislation established
no formula on which the amount of this paymentwas to be determined. The second
key area of reform dealt with removingon-going conflicts over such payments
from the Court system and handingthem over to arbitration.
c. SUBTEL
oversight powers
At long last,
the reforms implemented in 1985 specified the oversightattributes and powers
held by SUBTEL in order to ensure fulfillment of legalrequirements, regulations
and technical standards by concessionaires, permitholders and users. Furthermore,
sanctions on transgressions of those legalbodies were made more flexible in
an effort to ensure that they could beeffectively employed by SUBTEL.
4. SUBSTANTIVE
REFORMS
In early 1987,
the Ministry of Transportation and Telecommunicationsissued a decree which introduced
substantive modifications into the GeneralLaw on Telecommunications passed in
1982. Key changes included:
a. Compulsory
public phone service
Companies
receiving concessions for public phone service were requiredto provide service
in their area within a maximum of 2 years following approvalof the request.
Since it was
impossible for some companies to fulfill this requirementin such a short period
of time, timetables were established to graduallybring areas on-line over a
period of 10 years. Under no circumstances couldthese areas be smaller than
the urban areas which had local service at thetime the new legislation was approved.
Similarly,
concessionaires were authorized to increase their area ofcompulsory service
within the overall area assigned to them. A request fora new concession needed
to be filed only where such expansion overlappeda portion or the entirety of
the compulsory zone of another concessionary.
The key purpose
behind these legal changes was to provide an impetusfor the development of phone
service so that users could acquire lines asquickly as possible. From this perspective,
other legal clauses -- whichrequire additional procedures for telephone companies
to expand -- mustbe implemented without loosing sight of the objective of serving
the client.That is to say, these additional regulations should not serve as
an obstacleto telephone development so long as the companies receiving concessionsadhere
to technical stipulations. One way of adjusting the regulations tobetter suit
the expansion of phone services would be for the authoritiesto conduct inspections
once installations are completed to ensure that technicalcriteria are met and
impose sanctions on those companies which fail to meetestablished standards.
b. Reimbursable
bonds
One of the
fundamental aspects which made it possible for telephone companiesto acquire
the resources necessary to comply with the compulsory serviceareas was the establishment
of a system of financing through company sharesor bonds. This system, which
had already been successfully implemented inthe electrical industry, was easy
to set in motion in the field of telecommunicationsand gradually came to replace
the so-called "phone justifys." Theold fee system, in addition to serving
as a tariff distortion, did not effectivelyprovide companies with new resources
for investment given that the revenuegenerated in this fashion formed part of
the companies' profits which, inthe case of the CTC, were distributed as dividends
among shareholders.
The new mechanism
was utilized in privatizing the CTC and resulted ina diffusion of property.
c. New
rate schedule
Undoubtedly,
the most important legislative modification was the introductionof a new rate
schedule for local fixed public telephone service and longdistance calling,
for comminution and/or data transmission either as intermediaryservices or on
private circuits. In this sense, the principal of freedomof rates for all services
was retained. However, in those cases mentionedearlier where competitive conditions
did not exist, as determined by theanti-monopoly commission, the government
was authorized to regulate rateschedules. The biggest innovation was the incorporation
of statutes whichexplained the basic aspects of the tariff structure: criteria
and methodology,procedures, oversight agencies, review frequency and price adjustment
criteriafor each study.
- Criteria
and methodology:
The general
criteria established tariffication at a marginal cost ofeach affected area,
with the verification that the resulting rate resultin sufficient revenue so
as to cover the total cost of providing a similarservice in the area by an efficient,
model company. Regulations were adoptedto limit crossed subsidies among services
in those cases where more thanone service is provided in a common tariff area.
The methodology
for applying this criteria was described in considerabledetail in the legislation
and descriptions of each item to be taken intoconsideration, as well as the
procedures for establishing item costs, wereprovided.
- Procedures,
oversight agencies, review frequency and adjustment criteria.
Rates are
calculated to cover a 5-year period, expressed in terms whichallow for indexation
and formalized through a decree issued by the Ministryof Transportation and
Telecommunications. During the period rates are ineffect, companies may automatically
readjust their fees in accordance withvariations in the cost of the primary
supplies required to provide servicesas stipulated in the indexation formulas.
One of the
principal advantages of establishing a period of five yearsfor rate studies
is that it provides sufficient time for concessionairesto implement improvements
and internalize the corresponding revenue. Thechief drawback is that a dislocation
in rates is possible as a result ofstructural modifications in the cost of items
not included in the indexationvariables. Upward dislocations resulting from
diminishing costs can be resolved,when there is competition, through rate reductions
by concessionaires. Whenthe dislocation is in the other direction, however,
the concessionary mustabsorb the additional expense of obtaining supplies. Nonetheless,
the benefitsof the stability generated by a five-year rate scheme and the absence
ofconstant debate over pricing outweigh the drawbacks.
The procedures
for conducting studies and implementing tariff schedulesare described in detail
in the legislation. In essence, three stages arecalled for: definition of the
bases for the study; realization of the study;review and implementation of the
resulting rate formulas. The first andfinal stages are conducted by the government,
while the second is conductedby the concessionaires, either directly or through
specialized consultants.Should differences arise in terms of the definition
of the bases for thestudy or the results of the review process, the opinion
of a specializedcommittee can be requested. In any case, the final decision
lies in thehands of the governmental authorities.
The definition
of the bases for the study is of crucial importance inachieving a cost-effective
rate. In order to make this process as transparentas possible, the legislation
requires that all of the criteria utilizedin the formulation of the calculations
be specified: perspectives for thestudy, network optimization criteria, definition
of tariff areas, technologyto be considered, etc. Such transparency has led
to a reduction in the marginof conflict over the review process and approval
of the tariff study.
Given the
large distortion presented by the regulated tariffs, the legislationcalled for
a maximum adjustment period of 5 years, in accordance with acalendar to be established
when the results of the first tariff study wereimplemented.
V. SPECIFIC
ACTIONS TAKEN TO PRIVATIZE LARGE COMPANIES
In addition
to the efforts to prepare the regulatory framework describedabove, the Chilean
authorities began to take measures aimed at privatizingthe state-owned telecommunications
companies. The privatization processwas administered by CORFO, the official
owner of the State's shares in theindustry. The mechanisms utilized for privatization
included the auctioningof share packages on the Stock Market, direct sales of
shares to workers-- paid for with indemnization funds corresponding to the number
of yearsof employment -- as well as sales to foreign buyers and the acquisitionof
reimbursable bonds by clients.
In the case
of the CTC, the company's tremendous need for investmentmade the strategy of
sale to foreign buyers with a commitment to investparticularly important. This
mechanism, implemented by CORFO in late 1987,was wholly successful and as a
result by early 1988 the CTC had been fullyprivatized, producing an immediate
boost in its development.
For ENTEL,
privatization took place primarily through the sale of sharepackages on the
Stock Market. An interesting aspect of this privatizationprocess which differentiates
it from that of the CTC was that the new ownersacquired only existing paper
(additional capital investment was not neededto expand the company) as pending
projects could be financed with depreciationand debt. Nonetheless, private participation
produced tremendous dynamismin the operations and development of the company.
VI. CURRENT
STATUS OF THE INDUSTRY
A review of
the physical and economic indicators achieved following privatizationmakes it
clear that the process has been wholly successful, although itwill probably
be several years before its full impact is registered.
From the perspective
of physical development, the private firms haveshown tremendous dynamism in
meeting demand and moving forward with developmentplans. This progress can be
seen in the charts provided earlier in thischapter.
Moreover,
state-of-the-art technology, including cellular phones, networkdigitalization
and the use of fiber optics, is being introduced in Chile.
Additional
data on the privatization of the large, state-run companiesis provided in Charts
12, 13 and 14. Chart 12 reflects the evolution ofthe property of the CTC and
ENTEL during the 1980s, showing how State participationin the industry fell
from over 90% in 1982 to just over 70% in 1987 andto zero in 1990. Furthermore,
reasonable levels of property dispersion havebeen achieved through the privatization
process, as can be seen in Charts13 and 14.
2. PERSPECTIVES
FOR THE FUTURE
Industry perspectives
are promising; as we have noted, the large companiesare developing with considerable
dynamism and efficiency in terms of theirexpansion plans and continue to modernize
services currently provided andintroduce new ones. The legislation currently
in place has been administeredwell and provides an adequate framework for continued
efficient development.
Technological
evolution may mean that in the future services will beintegrated in such a fashion
that monopolies are formed where today theydo not exist. Should this occur,
the matter of how to regulate prices forintegrated network services will have
to be addressed.
3. PENDING
PROBLEMS
The problems
of fixed telephone service are essentially resolved; itwill continue to be a
natural monopoly and existing legislation providesadequate mechanisms to ensure
regulation. Most likely, it will be necessaryfor the State to place an emphasis
on providing regulatory agencies withsufficient resources to constitute a good
counterpart to the tariff studies.This is vital to providing assurances to users
that the fees they are payingare truly cost-effective, independent of the professionalism
and good intentionsof industry companies in conducting those studies.
In areas where
telephone development projects require the use of directsubsidies -- such as
rural networks, for example -- the State, in grantingsuch financing must take
care not to interfere with the emergence of serviceswhich phone companies might
otherwise have developed spontaneously.
Conflicts
also exist in the development of data transmission networks,as does the classic
problem of the separation of activities between theCTC and ENTEL. In analyzing
potential solutions to this problem it is importantto recall that subsidies
from long distance to local calling continue toexist. A second factor worth
considering is that the maximum rates ENTELis authorized to charge for transmission
services provided by the CTC, whilecomplying with the costs established in prevailing
legislation, do not representthe maximum effective rates given that ENTEL currently
utilizes technologywhich makes it possible to provide those same services at
lower rates.
The attitude
of government officials in responding to this type of conflictshould focus on
ensuring that participating companies do not acquire monopolies.If the market
is left to act for itself, any over-investment which may occurin the industry
should not be a problem; moreover, this may be the bestpath for bringing prices
down, should companies with maximum rates set beyondthe bounds of the what the
market will bear fail to react in time. The alternative-- reconsidering a separation
of areas of activity on the grounds that duplicationof investment will reduce
efficiency -- may, in the long run, hamper developmentby providing excessive
protection to industry companies.
CHART 12
STATE PARTICIPATION
CHART 13
CTC SHARE HOLDERS
(December 1990)
CHART 14
ENTEL SHARE HOLDERS
(December 1990)
Bibliography
- Agurto, R. "Documentos de trabajo sobre telecomunicaciones,"Numbers 66/82, December 1982, 51/83, August 1983 (co-authored with Bernstein,S.) and 29/85, August 1985. Comisión Nacional de Energía.
- Comisión de Telecomunicaciones of the Colegio de Ingenierosde Chile, A.G. (Bonzi, E., President, Arenas, G., chief of the draftingcommission) "El Colegio de Ingenieros y la Ley General de Telecomunicaciones",Revista Telecomunicaciones, March 1991.
- Compañía de Teléfonos de Chile, "AnuarioEstadístico del Desarrollo Telefónico" 1960-1990.
- Domínguez, M. "El Proceso de Privatización en elSector Telecomunicaciones en Chile." ENTEL Chile, 1990.
- Fontaine, E., Valdés, S. "Libre Competencia y Autorizacióna Concesionarios Locales Para Operar en Larga Distancia." November1989.
- Ministry of Transportation and Telecommunications, Under Secretariafor Telecommunications, "Planificación de las TelecomunicacionesNacionales." November 1982.
- Ternero,
R., "Compañía de Teléfonos de Chile,CTC." Document
included in Chapter VI of "Estado Empresario yPrivatización en Chile."
Cuadernos Universitarios, ResearchSeries No. 2, Andres Bello National University.
May 1990.
Notas :
1 The Thompson Project, approved in 1977, consistedof installing 168,000 lines.
2 Pending applications for phone linestotaled between 110,000 and 230,000 lines
for the period 1982-1987 but overalldemand was much greater.
