OECD Review of Telecommunication Policy and Regulation in Mexico

 

Remarks by Mr. Andrew Wyckoff,
Director for Science, Technology and Industry OECD

30 January 2012
Mexico City, Mexico

 

Secretary Pérez-Jácome, Commissioner-President De Swaan, Ladies and Gentlemen

 

Let me first thank the Mexican authorities, -- especially the SCT and Cofetel -- for giving the OECD the opportunity to provide analysis and recommendations on the performance of the Mexican telecommunications industry.

This review was requested by Federal Telecommunications Commission through the Ministry of Communications and Transport. We welcomed this request which reflects the Government’s interest in an independent, evidenced-based approach to evaluating telecommunication policy and regulatory framework of Mexico.  OECD provides a mirror in which countries can see how they look in comparison to international best practices.

Secretary-General Gurría is right that this is indeed a key sector.

- Communications are now so pervasive that we can hardly imagine today any single social or economic interaction without mobile phones or Internet broadband access.
- Innovation and economic growth are now highly dependent on having access to efficient and cheap communication services. (slide 1: telecomsa key infrastructure)

- This review comes at an opportune time. Reform in the telecommunication sector can play a significant role by contributing to a new model of growth that takes advantage of Mexico’s demographic advantage as young people enter the labour force that could propel Mexico’s economy  forward.

 

The lack of effective competition in the Mexican telecommunication sector has led to high prices, poor coverage and insufficient investment in the sector.


- In turn, lack of competition imposes a cost on businesses and also on consumers.
- The burden of this cost is especially severe on smaller businesses and poorer consumers.

The OECD report estimates that the welfare loss due to lack of competition (Slide 2 - high prices and unrealised subscriptions) is USD 26 billion per year, equivalent to 1.8% of the Mexican GDP per annum (over the period 2005-2009).
- This is a significant burden [roughly half the money raised by VAT tax in Mexico in 2008 (3.78% of the GDP)].

 

But even more important is the opportunity cost for Mexico in that the economy is deprived of a platform for innovation, slowing down economic growth and job creation.

- This places a burden on its competitiveness in an increasingly knowledge-based economy.

High prices (slide 3:  broadband pricing) lead to unrealised subscriptions which can be seen in benchmarking Mexico with other OECD countries:

- Mexico ranks among the lowest three OECD countries in fixed-line, mobile and broadband take-up (Slide 4: broadband penetration).

- It also lags behind many of its Latin American counterparts in mobile penetration. For example, Chile, Argentina, Brazil, Colombia and even Guatemala or Honduras have a higher mobile penetration than Mexico.

- Moreover, the incumbent’s market share in the mobile market is unparalleled in the OECD (slide 5: market of mobile operators in Mexico and OECD).

Why is Mexico lagging in the telecommunication sector compared to other OECD countries?


- OECD countries have been developing, since the mid-1990s, a telecommunication regulatory framework aimed at building up competition in markets through regulatory reform.
- This has been a slow and difficult process but has shown positive results. Mexico has not yet succeeded in this process which involves legal reform, institutional reform and economic reform of the sector.

The objective of this OECD report  is to put forward best practice recommendations for the reform of the telecommunication sector so that Mexico can reap the same benefits as the other OECD economies.

I will walk you through the main recommendations provided in the study, but let me remind you of probably the most important message that I would like to convey this morning:

- Telecoms should no longer be seen as a narrow specialised sector devoted to telephony.
- Rather it must be seen as a platform, relevant to the whole economy and society.
- Fundamental changes in the telecommunications industry should take place in the interest of all Mexicans.
- Implementing reform in telecommunications should deliver a more competitive economy, new sources of growth and productivity gains.


The appeal system “amparo” (slide 6)

Let’s start with the appeal system

One of the main failures of the Mexican regulatory framework concerns the judicial appeal system -the (amparo) system.

- Under the current system, a company affected by a regulatory decision may file one, two or one hundred amparos.
- Then a judge may decide to accept an injunction, and suspend the implementation of the decision until a court rules on the substance, which may take many years.
- The practical outcome of this is the inability to regulate the market, and a large incentive for operators (especially the incumbent) to file many amparos.

 

We welcome the decision of the Supreme Court to change this for interconnection decisions, partly based on evidence provided by the OECD.

- However we think this should be extended to all regulatory decisions.
- Granting injunctions should become an exception, not the rule, as is the case in all OECD countries.
- In turn this would reduce the incentive for market players to appeal.

 

Our proposals to reform the appeal system include setting up special judicial panels to hear telecommunication issues where the judges have knowledge of the sector or creating a specialised Federal Court dealing with economic issues.


The “double-window” (slide 7)

 

Another major problem is the so-called “double-window” (dob-le venta-ni-ya).

- For example, Cofetel provides an opinion to SCT, which then undertakes its own process which leads to the delivery of a decision.
- Or Cofeco carries out a market analysis, on the basis of which Cofetel may decide to impose certain obligations.
- Having two or more authorities involved in a decision (beyond a merely advisory role), makes decision-making extremely complex and weak, as it opens up many opportunities for legal challenges.
- This is why some decisions are never implemented and they are challenged and often overturned in courts.

Therefore, we recommend that the “double-window” be removed in regulatory processes – such as declaring dominance in telecommunications markets and imposing obligations, shared now by Cofetel and Cofeco -, so that one authority, and only one, is responsible for the whole process.

- Of course, throughout the procedure, this authority may request advice from another institution.
- But this authority should remain fully responsible and accountable for the decision.


Strengthening the powers of Cofetel (slide 8)

In conjunction with this, Cofetel’s powers must be strengthened.

- It should have stronger and more defined authority, and a larger autonomy (for example, in terms of budgetary resources) than it has now.
- Its job is to impose regulations to help generate competition in the market.  Give this, it makes no sense that in many instances Cofetel only provides an opinion for submission to SCT.
- Cofetel should become a more powerful, independent regulator.
            o For example, it should be able to impose sanctions, with fines sufficiently high to act as a disincentive for operators to behave in anti-competitive ways and from recidivist behaviour.
            o At the same time, however, Cofetel’s decisions should be more transparent than they have been in the past, by means of wide public consultation procedures, sound decision making based on evidence with clear argumentation.


Drawing a line between policy and regulation (slide 9)

In relation to the institutional framework, a clear line should be drawn between policy and regulation.

- The SCT’s responsibilities should be limited to policy-making and Cofetel to regulating the market, and both functions should be set out clearly.

For example, we advocate that the concession granting, modification and revocation system should be fully considered a regulatory activity (slide 10).

- Therefore, they should be Cofetel’s responsibility.
- However, they should not be transferred in their current form.
- The concession system should be simplified and transitioned towards a class licensing system.
             o This simpler system would encourage new entrants, which would only have to agree to be bound by regulation and submit information as requested by Cofetel.
            o A more complex licensing system only makes sense when scarce resources are involved – like spectrum - but not for general market entry.


Foreign ownership (slide 11)

Another ongoing issue in Mexican telecommunications is foreign ownership.

- The OECD is convinced that keeping barriers to foreign ownership in any industry is at odds with efficiency and free market entry.
- Mexico needs more foreign operators entering the market and improving competition.
- The current investment caps for fixed networks reduce the potential for competition, transfer of technology and best market practices – they make no economic sense.
- Therefore, foreign investment and ownership restrictions in fixed-line networks should be lifted to encourage new market entry and investment.


Removing bottlenecks (slide 12 )

Finally, some of the existing bottlenecks in the Mexican telecommunications market should be removed or operators should be given the tools to bypass them.

- Bottlenecks can refer to scarce resources or facilities that need heavy investments to be replicated by alternative operators.
-  Examples of those are: the telephone local loop, spectrum resources or backbone connectivity.

 

Cofetel should establish non-discriminatory conditions for alternative operators to access the incumbent’s local loop, including local loop unbundling.


- It is hard to imagine a vibrant telecommunications market if we keep a “de facto” monopoly for fixed networks in most of the country, including all rural areas.
- Local loop unbundling has been the lever for competition in a majority of OECD countries.
- For example, it has been key for developing competition in France, the United Kingdom and, more recently, in New Zealand. And it is even more important in Mexico as no other network has extensive coverage.

 

Another bottleneck is access to spectrum resources or backbone connectivity (slide 13: spectrum and backbone).


- In this regard, a positive development was the auction of some fibre of the Federal Electricity Commission (CFE ). However, this is not enough.
- More fibre strands of the CFE should be made available, as it still has spare capacity.
- As prices for backbone connectivity drop, so will barriers to entry for third operators, which would in turn boost competition and consumer choice.

Spectrum tenders 20 and 21 were also a positive step towards increasing spectrum resources to pave the way for the provision of advanced mobile broadband services.

- These efforts should continue, with due attention given to ensuring competition in both areas.


Television license for Telmex (slide 14)

The incumbent has indicated that it wishes to obtain permission to provide television services.

- Certainly convergence is a technological trend which cannot be ignored and it is important to eliminate market barriers to entry in the broadcasting sector as well as the telecommunication sector.
- Nevertheless, given the competitive conditions in the Mexican telecommunications market, certain obligations and conditions should be imposed on the incumbent before allowing it to enter the television market. 
- These conditions should ensure that the incumbent accepts:
     o  asymmetric regulations,
     o accepts the elimination of the non-competitive zones in providing interconnection,
     o provides access to its passive infrastructure and
     o provides and adheres to a reference interconnection offer including a service level agreement with quality of service  conditions.


Other measures (slides 15&16)

 

Other measures that the report puts forward are:

- The consolidation of local calling areas as determined by Cofetel should be mandated to ensure lower calling costs between affected areas.

- Entry of resellers in the mobile market should be simplified and encouraged, and entry of mobile virtual network operators (MVNOs) facilitated by requiring obligatory national roaming agreements.

- Quality of service indicators should be published on a regular basis, including wholesale indicators from the incumbent, which are of relevance to new entrants, be made available to them.

- Cofetel should be authorised to regulate interconnection tariffs ex-ante to foster competition among operators. This will provide a level-playing field and sufficient legal certainty for all mobile and fixed players.

- Responsibility for setting and administering the price cap scheme used to regulate the incumbent’s end-user prices should fall under the sole responsibility of Cofetel.

- The government should clarify the policy on universal service and articulate explicit plans on how to implement this policy. Given the size of the country and its sharp income inequality, sound universal service policies are crucial to avoid situations of exclusion.

- Cofetel and Profeco should clarify their roles and responsibilities with regard to consumer empowerment, and the action they can take to facilitate consumers in switching service providers.
Conclusion (slide 17)

Let me conclude by reminding you that change has to be driven on all fronts.


- Unfortunately, it is not enough that the SCT and the Cofetel do their job and facilitate change.
- As Secretary-General Gurría just highlighted, there is an urgent need for coordinated, joint action by the Executive, the Legislative, and the Judicial branches for these reforms to be accomplished. There is no time to lose.

 

I realise that an election is underway, but these issues transcend politics.

 

To gain competitiveness, to generate growth and to reduce the burden on its people, Mexico must make these changes, regardless of the political orientation of the ruling administration, regardless of what happens in the upcoming election.

 

You can count on the OECD support in implementing these changes.


Thank you very much

 

 

 

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