The Central Bank of Sri Lanka’s 2006 Annual Report states that: “The GDP deflator, which measures the price changes of all goods, produced in the economy, increased by 10.3 per cent in 2006 compared with the rate of 9.9 per cent in 2005. High price increases were recorded in most sub-sectors except in mining and telecommunications, where prices were lower compared with the previous year. Higher fuel and material costs together with the depreciation of the Sri Lankan rupee during the year led to the increase in prices of most finished goods and services.”
This is quite different from the spurious growth shown by government-owned enterprises driven by the higher rupee value of the output of the Petroleum Corporation which contributed to 90 per cent of the entire output of government-owned enterprises.
20 Comments
sittingnut
may be you should stick to telecoms and refrain from gratuitous additions as above. the deflater is there to eliminate the ‘spurious growth’ due to “higher rupee value”. in other words to eliminate the effect of inflation.
harsha de silva
sittingnut has missed the forest for the trees!
the point is that the competition brought on by years of reform and liberalization in the telecom subsector is actually having a deflationary impact even in our money-printing fuelled inflationary economy. unfortunately there are no price reductions in the electricity and water subsectors dominated by loss-making SOEs.
sittingnut
i was referring to last para of th above post as made clear by extracting phrases from it . it was completely gratuitous or a failure in composition since he fails to make the connection.
btw he may ( or may not) have wanted to say what you said but he certainly did not say it in the above post. you probably knows what is in his mind, i merely commented on what he actually wrote.
Double digit
Over the last 2-3 decades telecom charges have come down in every economy. This is necessarily due to reforms and liberalization but not sufficiently.
The other factor behind this fall in prices was the technological developments taking place in the telecom sector. For example, if the communication technologies remained in the analog age rather than moving to digital, or if we were to still use copper rather than high bandwidth fiber, we would never have witnessed such a change.
Such drastic technological changes did not happen either in power generation or water distribution for may be the last 100 years. So even with reforms and liberalization process it would be too unrealistic to expect the charges would fall proportionately. They may fall a little, but not as they would in telecom.
Divakar Goswami
Good point Double Digit. However, without reforms and a competitive environment the cost-savings from technological innovation invariably never get passed on to consumers. For example, digitalization of exchanges in many economies were done prior to reforms and all the cost savings apparently were pocketed by the incumbent because prices remained static in the pre-form era. Why would a monopoly incumbent provider have any incentive to reduce prices?
One concrete example is in the area of international settlements. The international settlements regime remained relatively stable until reforms were introduced in the US and UK. By stable I mean that international retail prices were stable and so were the traffic flows between pairs countries. However, as reforms were introduced in the two countries the cost savings from falling bandwidth prices on submarine cables and telecom equipment were to an extent passed on to consumers in the form of lower international calling prices. Operators in countries lacking reforms were beneficiaries of falling operating and equipment costs but kept their international calling prices at the same level. The asymmetric prices resulted in also asymmetric traffic flows (more calls were initiated from US, UK and other reformed countries to other destination countries because international calling prices were substantially lower in the former than the latter). The perverse incentive of operators in unreformed countries (mostly developing) to make larger revenues from settlements payments resulted in international calling prices remaining high in those countries. This of course destabilized the international settlements regime and today it is more or less defunct.
But you make good points about water and electricity sectors not benefiting from cost-savings from technological innovation to the extent of telecoms.
Double Digit
Divakar,
You ask: Why would a monopoly incumbent provider have any incentive to reduce prices?
If the monopoly incumbent provider is a private player, you are partially right, he has less incentives to reduce prices. (Let us not forget even a monopolist has incentives to reduce prices, if the volumes increases his margins he will obviously lower prices, but lets not get into that)
However, as it happens in many countries the monopoly incumbent provider is government and of course the government has a good incentive to lower prices. It wants to be populist and perhaps unsuccessfully will try to be.
What do you think the telecom prices would have been if Sri Lanka had not undergone the liberelisation process in 1990s? (ceteris paribus)
Yes, we might have had not more than 500,000 subscribers perpetually frustrated about the quality, with about 2 or 3 million waiting list. However those 500,000 subscribers would have paid perhaps less what we pay today. The losses of SLT would have been susidised by the treasury.
That is exactly what happens in case of other utilities. CEB is the monopolist electricity supplier in Sri Lanka, but the charges we pay are not exorbitantly high. For some sections of the population they are even below the cost. I guess if there are electricity reforms perhaps we (consumer’s hat) might have to pay more charges, though we (taxpayer’s hat) may benefit indirectly.
Not that I am against reforms and liberalisation. I am fully for it, but less consumer prices is not the reason why we should opt for liberalisation.
Saying liberalization will reduce prices per se is a weak argument. Liberalisation encourages competition, gives consumers value for money; promotes economic expansion, offers more choice and is good for all. (not just for consumers) Theoretically even non consumers benefit from liberalisation. That is why we go for it, not just to reduce charges, which may be just one objective.
In other words, we should opt for electricity reforms even if that means we (consumers) have to pay higher electricity charges afterwards.
Divakar Goswami
Double Digit your assumption that govt-owned monopoly provide lower prices than competitive telecom markets isn’t supported by empirical evidence. Some examples would be highly appreciated.
Images indeed speak more eloquently than words, as you can see in the graph below from the World Info Society Report 2006. Liberalization and introduction of competition has seen mobile prices fall steeply in India:
Double Digit
Divakar,
Why can’t you think out of telecom, which is not a good example for illustration purposes?
University education is a 100% government monopoly in Sri Lanka, but still the price of a university degree is definitely less (theoretically free) than what it would have been in any other country where the markets are liberalised.
So the urge to liberalise the university education market in Sri Lanka is not to reduce the prices but to improve the quality of the product.
Think you get my point.
So coming to the original point, asking why the electricity and water charges did not drop as in telecom is a weak argument for liberalisation. There may be some truth in that, but anyone can easily challenge it.
Divakar Goswami
Double Digit, I can speak only of telecom with some degree of confidence and at lirneasia we tend to focus on ICTs and to some extent on other network industries. But education is completely out of my realm.
Moreover, I am not sure you can generalize about the relationship between liberalization and prices from one sector (telecom) to another (education) (or vice versa).
I don’t step back from challenges. If there is evidence for the telecom sector where prices have gone up after liberalization (adjusted for inflation) I am very interested to know of those cases. To explain the counterintuitive is more interesting than explaining the obvious. And that prices for telecom services have come down after liberalization and introduction of competition is obvious…
MBA Student
Central Bank Annual Report (page 85) Says:
[quote]
Trade in Telecommunication and Information Technology
Services
Earnings from telecommunication services increased by round 55 percent to US dollars 68 million in 2006.
However, the increased competition among the telecommunication companies since the liberalisation of the international telecommunication gateway in 2003, has driven down the international call charges encouraging Sri Lankans to originate international calls from Sri Lanka. As a result, outflows on account of telecommunication services continued to grow since 2003. Consequently, the net earnings from telecommunications decreased by 24.5 per cent to US dollars 19 million in 2006.
Exports of Software and Information Technology (IT) enabled services such as IT related Business Process Outsourcing (BPOs), continued to grow in 2006, supported by further improvements in IT related infrastructure facilities. Net earnings from software and IT enabled services exports increased by around 19 per cent to US dollars 98 million in 2006.
[unquote]
Can someone explain;
(a) The difference between ‘earnings from telecommunication services’ and ‘net earnings from telecommunications’? (According to CB the earnings from these two segments are very different. The first one is $ 68 mil and second one is $ 19 mil. Also note the first figure has INCREASED while the second figure has DECREASED.)
(b) How the earnings from IT and ITES services are much higher than the earnings from telecom? ($ 98 mil against $ 68 mil) The common feeling is telecom sector is much larger than IT. How come this happen?
(c) The earning from telecom services (even if we consider the international call revenues) is $ 68 mil or 0.24% (zero point two four percent) of GDP. Isn’t this too low? Aren’t we using telecom more than this?
MBA student
PIM
KJ
As both Divakar and Double digit has argued on opposite sides of the coin, I felt it appropriate to look at the coin itself from an elevated position.
Divakar’s argument is correct to illustrate on the impact of liberalization on mobile tariffs in India and it’s also correct for Double digit to say that if the electricity or water sectors are liberalized, in fact the prices could go up.
The underlying argument is that with liberalization, the price of a service will stabilize – if not, will be driven towards the cost (minimizing the gap of cost of providing the service and price charged to supply it). And we see that in SL, telecom sector and electricity or water sector are on either sides of the equation.
Since the introduction of telecom technology, it was considered as a not-so-essential service (in SL context –and even in India I believe). This was the situation in the fixed line segment. When it comes to mobile communication, it was considered as a luxury service, which commanded a premium price. Earning supernormal profits. Therefore, with liberalization it drove the prices lower (as said before, minimizing the gap)
But electricity and water segment is contrary to this and are considered as essential items, therefore provided at subsidized prices, incurring losses to the entity providing it. Liberalization of this kind of a service will only result in an unnecessary pressure for that entity to at least break-even from the services provided, which in turn will drive the prices up.
KJ
As both Divakar and Double digit has argued on opposite sides of the coin, I felt it appropriate to look at the coin itself from an elevated position.
Divakar’s argument is correct to illustrate on the impact of liberalization on mobile tariffs in India and it’s also correct for Double digit to say that if the electricity or water sectors are liberalized, in fact the prices could go up.
The underlying argument is that with liberalization, the price of a service will stabilize – if not, will be driven towards the cost (minimizing the gap of cost of providing the service and price charged to supply it). And we see that in SL, telecom sector and electricity or water sector are on either sides of the equation.
Since the introduction of telecom technology, it was considered as a not-so-essential service (in SL context –and even in India I believe). This was the situation in the fixed line segment. When it comes to mobile communication, it was considered as a luxury service, which commanded a premium price. Earning supernormal profits Therefore, with liberalization it drove the prices lower (as said before, minimizing the gap)
But electricity and water segment is contrary to this and are considered as essential items, therefore provided at subsidized prices, incurring losses to the entity providing it. Liberalization of this kind of a service will only result in an unnecessary pressure for that entity to at least break-even from the services provided, which in turn will drive the prices up.
harsha de silva
divakar is right that in telecoms prices have actually come down in real terms in a number of countries [including in sri lanka with seriously high inflation]. this is due to [ceteris paribus, particularly technology] competition in the sector. in sri lanka we saw a ‘disruptive competitor’ in the form of SLTmobitel under new [and better] management that went in to a price war with dialog and prices went down across the board. now relax the assumption of ceteris paribus for technology and think of what that will do to prices! but the point is all this happened because of competition created by liberalization in the sector. the world info society chart put up by divakar very nicely depicts how the prices fell after the indian liberalization in 1999 [NTP 99]. just to add one more point, the supposedly international monopoly SLT had, meant close to 100 bucks a minute to call the US prior to the 2003 liberalization. prices crashed. SLT unlike double digit argued earlier [government owned] never brought down these prices on its own.
however, double digit is on the money when he says prices may not go down after liberalization in water and electricity. i agree, prices will most certainly go up to reflect costs. but that does not mean prices will stay up. it cannot be argued that prices cannot come down with technological improvements or more suitable generation choices that will with absolute certainty come in with competition created through liberalization. it will also come down after the ineffeciencies and stuffing of people to the utility are removed [i dont have the numbers for CEB, but i know SLCTB employs 9.5 persons per bus] so the point is prices will be cost reflective. it is quite possible to bring down the cost of generation and distribution over time. [i’ll leave transmission out for the time being]. thus it is quite possible to bring down the [real] prices over time but still reflect true costs of production.
what we know [from years of cross contry studies] is that reforms have significantly improved performance in liberalized infrastructure sectors. investment have increased and productivity has improved. but, as correctly stated by double digit, cost reflective prices have also been established; i.e., higher prices. now, the problem then is with the distributional impacts of these reforms or liberalizations.
double digit, the problem is that we give subsidies to everyone. does the CEB need to give you electricity at the same low [less than cost] price it gives it to a person who earns less than usd 1 a day? what about the NWSDB? what about the CPC? what about the National Health Service? what about the local school and university you might have gone to? is it not amazing to see how fabulously rich memebers of parliament or their relations come to petrol stations in huge diesel SUVs and pump until the tank spills over at a massive subsidy?
so that is where i disagree with you. i dont buy your argument of reform is putting “unnecessary pressure for that entity to at least break-even from the services provided, which in turn will drive the prices up.” i know you will tell me that these are “essential” services so they are different. not so. you pay full price. let the person who genuinely can not afford it get it at the subsidized price. that is what we call “targeted subsidies”.
so the solution is not to stick with the current system because it provides essential services at a very cheap price to everyone. the solution is to reform the system, allow for greater investments and improved productivity and deal with the distributional impacts of these reforms [i.e. higher prices for some in society] via properly administered targeted subsidies. this does not mean prices will go up for everyone; only to those who can pay. other’s will still be provided subsidies [vouchers some call them] to obtain a certain [essential] amount of that service at either current or even lower prices.
harsha
ps: the central bank printed LKR 38,579,000,000 in 2006 to bridge part of the budget deficit partly due to the massive losses of CEB and CPC. this was the primary reason for the 20.5% inflation. think about it…
Double Digit
Harsha,
Like Divakar, you too are barking at the wrong tree.
Nobody here said liberalisation is bad and consumers always get better prices in monopolies. That is not the point.
In my first post in this thread I said clearly, ‘Over the last 2-3 decades telecom charges have come down in every economy. * This is necessarily due to reforms and liberalization but not sufficiently.’*
The point here is, yes, we need liberalisation, but that per se not why the telecom prices have come down.
If you take any country which still has government monopolies in telecom, (I think Viet Nam still has a monopoly) you will find even in those countries the telecom consumer charges had come down over the last two decades. (Of course not to the rate they have come down in India etc)
There are two clear reasons;
(a) technological developments (especially moving from analog to digital)
(b) high demand for telecom facilities increases the volume, thereby reducing the per unit consumer charges
If a b c=z, you cannot say z is proportionate to a, although an increase in ‘a’ sometimes (depending on how b and c changes) results in an increase in z.
The points I try to make are;
(a) Saying liberalisation per se will reduce other utility charges just because it had reduced telecom charges is a weak argument. It may be true, but a weak argument.
(b) The reasons why we opt for liberalisation is not just to reduce the consumer prices (which might not even happen in some cases) Liberalisation should be carried out to gain far better results than just reducing consumer charges.
Having said that, yes, I completely agree with you what you say about CEB and CPC. I agree with you we should reform these two sectors, *even if we, as consumers, were to pay higer prices for electricity and petrol/diesel by doing so*
I never said we should stay with the current system. (I do not know from where you get these ideas) We should obviously change the system, but that is with realistic expectations.
Only politicians can promote liberalization as a magic bullet to reduce consumer prices.
And the last quote you attribute to me is not even mine. It is KJ’s.
Divakar Goswami
Vietnam has about 7 mobile operators. What monopoly you are talking about? I would really like to see evidence-based arguments instead of assuming that in markets that have single supplier of telecom services the prices have come down regardless of whether there is competition or not.
Double Digit
Divakar,
Take the example of Solomon Islands. (This is one of the countries I find information on the web. If you have access to ITU databases, I am sure you will find more.)
First a brief background:
Communications has always been difficult in the Solomon Islands, but with the country in a state of civil war since mid-2000, many telecommunications facilities were totally destroyed and consequently all developments of telecom facilities were placed on hold. By early 2006, restoration of telecommunications was progressing slowly, hampered by inadequate funding. All telecom services are provided by Solomon Telekom, which had a monopoly status until mid-2003. Teledensity has fallen from its peak of almost 2% in 1999 to 1.4% in 2005.
Source: http://tinyurl.com/36vxr9
Surely this is not an economy which had undergone the liberalisation process.
Now see at http://tinyurl.com/2jusm7 (Table 3) how both the fixed and mobile prices have reduced from 2000 to 2003.
harsha de silva
double digit
ooops! i had inadvertantly mixed uo you and KJ; sorry.
it was KJ who said “liberalization of this kind of a service will only result in an ***unnecessary*** pressure for that entity to at least break-even from the services provided, which in turn will drive the prices up.”
i am glad you agree with my points on CEB and CPC.
however, the generalized point i was making was not that we should liberalize to bring prices down. in fact i argued it will go up before coming down in electricity and water even though prices have come down [from cost ] in telecoms due to liberalization. this was very clearly pointed out by divakar.
what i said was “we know [from years of cross contry studies] is that reforms have significantly improved performance in liberalized infrastructure sectors. investment have increased and productivity has improved. but, as correctly stated by double digit, cost reflective prices have also been established; i.e., higher prices. now, the problem then is with the distributional impacts of these reforms or liberalizations.”
the point you are missing is by liberalization and therafter fostering competition in a well regulated sector we can have the cake and eat it too. it is a win-win as long as you agree you have to pay for your electricity and the person who honestly cant afford it gets a subsidy to use some ‘essential’ amount.
in this country, double digit, people have come to expect things for free! i wonder how long it is going to take for us to realize that nothing is free!!
samarajiva
I suppose the best answers to MBA student’s questions will come from CBSL, but I will provide an interim answer to a well thought out question (even if based on a wrong premise):
(a) The difference between ‘earnings from telecommunication services’ and ‘net earnings from telecommunications’? (According to CB the earnings from these two segments are very different. The first one is $ 68 mil and second one is $ 19 mil. Also note the first figure has INCREASED while the second figure has DECREASED.)
This chapter is about traded services, therefore the references are to revenues and expenditures for internationally traded telecom services. How does one trade telecom services? When foreign carriers terminate minutes in Sri Lanka (incoming international calls) they make payments to Sri Lankan carriers. Those are the earnings. When Sri Lankans call abroad, LK carriers have to pay foreign carriers to terminate those calls. These are the outflows referred to. Net earnings are earnings less outflows.
The 2003 reforms were incomplete. The plans included giving the public the ability to choose their own international carriers using short codes; and even choose different carriers to different countries. If this had been done, outgoing prices would have fallen even further than today, and outgoing call volumes would have gone up, resulting in outflows increasing. The 2003 reforms also envisaged the termination rates being reduced every year and illegal bypass eliminated. Actual earning from incoming international calls are higher than what the CBSL reports, because the CBSL knows only about the earnings of the 7 major operators; bypass operators are unlikely to report their earnings to the CBSL.
Of course, if maximizing net earnings is the objective, the govt could simply prohibit Sri Lankans from calling abroad, and allow only incoming calls. Then earnings would be x, outflows would be zero and net earnings would also be x. Unless the grey market in termination is addressed, it is even possible that net earnings could go negative. But in the end this does not matter, because liberalization (even partial) made possible the growth of IT and ITES exports (actually a lot more sectors such as apparel benefited from the reforms) and the benefits in these sectors can easily wash out the small pluses or negatives in telecom services.
(b) How the earnings from IT and ITES services are much higher than the earnings from telecom? ($ 98 mil against $ 68 mil) The common feeling is telecom sector is much larger than IT. How come this happen?
One has to always ask the question “what is EXPORTED?”. Sri Lanka exports software as well as ITES–commonly known as BPO services. In these industries, most of the output is exported, unlike in telecom, where most of the output is consumed internally.
(c) The earning from telecom services (even if we consider the international call revenues) is $ 68 mil or 0.24% (zero point two four percent) of GDP. Isn’t this too low? Aren’t we using telecom more than this?
This is not telecom as a whole, but internationally traded telecom services. For telecom’s contribution to the economy, you have to read Table 2.1.
MBA Student
Thank you, Prof. Samarajiva for the detailed explaination.
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