Regulation and investment

Posted on March 2, 2006 / 4 Comments

In the coming year, LIRNEasia intends to launch a number of activities intended to support the work of young scholars working on telecom reform issues of relevance to emerging Asia. As part of this effort we intend to provide self-archiving facilities for conference papers and journal articles, and provide a degree of exposure and commentary for a subset. This is the first effort in this regard.

Regulation and FDI: Sri Lankan Telecommunications Industry

Ms Asoka Fernando, PhD Candidate, Dept. of Management, Monash University

Abstract

This paper examines the role of the telecommunications regulator in Sri Lanka and assesses the effectiveness of its interventions in attracting foreign direct investment (FDI) into the telecommunications sector from a management point of view. The study finds that despite Sri Lanka has responded to globalization by liberalizing the telecommunications sector and timely establishing a regulator to monitor the industry, the interventions of the Telecommunications Regulatory Commission (TRC) have been only partially successful particularly in terms of meeting its full potential of FDI into the sector. Interventions of TRC have been reviewed in terms of creating environment for market entry and competition, management of scarce resources, tariff regulation and independence of the regulator, and revealed its inability to create sustainable investment climate for private investors. In conclusion, we argue that it is time to investigate whether the current regulatory model is the most appropriate arrangement for the prevailing economic, social and cultural circumstances in Sri Lanka.

Key Words: Privatization, Telecommunications, Regulation, Foreign Direct Investment

The full paper is here. Comments are welcome

4 Comments

samarajiva
March 3, 2006, 12:52 am
The paper sees the telecom reforms in Sri Lanka as having failed to deliver on many fronts, including attraction of investment. More specifically, the regulatory agency is found to have failed to attract adequate FDI.

It claims that Sri Lanka has failed to attract adequate FDI in telecom, providing data on overall FDI flows as well as FDI flows in telecom into Sri Lanka along with comparative data for Bangladesh, India, etc. These figures are not adjusted to account for the size of the Sri Lanka economy in relation to the comparators. This is a serious flaw.

de Silva and Khan (2005) show that on a per capita basis Sri Lanka had three times the FDI that India had (http://www.regulateonline.org/content/view/435/31/1/1/) and was much higher than Pakistan and Bangladesh.

The paper lists a series of complaints against the regulatory agency, most true, a few erroneous (e.g., at no time did either the government or the regulatory agency promise number portability; yet its lack is seen as a regulatory failure). This is understandable when the author is relying almost entirely on secondary sources, some such as Budde which are also based on secondary sources.

Specifically, the regulatory agency is blamed for not attracting adequate FDI. In Sri Lanka, the responsibilty for attracting FDI has been given to the Board of Investment. While it is correct that a decline in FDI inflows as was documented in Samarajiva and Dokeniya (2005; http://www.regulateonline.org/content/view/435/31/1/1/) is a symptom of policy or regulatory problems, it is not fair to blame the TRC for not doing something it was not mandated to do. In fact, the government diagnosed the problem and remedied it with a series of reform actions including the ending of the international exclusivity. FDI went up significantly from 2003 onward. If the argument of this paper is to be taken to its logical conclusion, one would have to praise the regulatory agency for this result, rather than the government.

In the latter part of the paper, Fernando allows that the mobile subsector has grown and focuses on the fixed sector. While fixed growth has been low after 2000-01, it is interesting how Fernando would react to the surge in fixed connection in 2005, after the reassignment of frequencies by the TRC that allowed the fixed operators to offer CDMA-based connections. The release of these frequencies also resulted in an increase in investment. Again, how does this jell with the overall argument?

The larger question is the comparison with an absolute yardstick. Everyone knows that governments of developing countries don’t work too well: that is part of the reason why those countries are not developed. One could measure the performance of reforms undertaken by such governments against an absolute yardstick as Fernando has done, but it does not seem a very fruitful path to take. Better would be an assessment that is comparative; or that is focused on specific reform actions.

Whatever said and done, Sri Lanka does have better telecom performance in the areas of connectivity and even price than other South Asian countries. I would be the first to say Sri Lanka can do better. I have even said that the failure to enact new legislation and to reform the regulatory agency in Sri Lanka when combined with the improved regulatory environment in Pakistan and the resultant explosive growth could result in Sri Lanka being overtaken by Pakistan within the next year. Yet I cannot defend the broadbrush criticism leveled by Fernando against the regulatory agency.

More care with data and a more reasonable, comparative assessment of policy and regulatory implementation is likely to yield more useful results.
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The author
March 14, 2006, 5:35 am
Many thanks for the valuable comments posted by Prof. Samarajiva together with useful sources. those will definitely be useful for further development of the paper.
harsha de silva
March 18, 2006, 7:36 pm
how has the author handled the issue of SLT divestiture proceeds? has it been considered fdi or not? this is not clear in the discussion. the reason why this distinction is important is because of the use to which the divestiture proceeds were put in to… also, did the regulator have a say in that decision?!

also, i agree with rohan in that the author could have (should have) made reference to the size of sri lanka’s telecom market when comparing with other countries in the region before dismissing the sri lanka figure. a paper i wrote on bangladesh makes reference to the sri lanka figures as investment per capita which to some extent standadizes the comparison. see http://www.regulateonline.org/content/view/435/31/1/1/

perhaps these points need to be addressed before the next draft of the document.