Transcript Slide 1

The Consumer Welfare Gains of
Guatemala’s Liberal Reforms
Thomas W. Hazlett, Giancarlo Ibarguen S.
and Wayne A. Leighton
Presentation to
“Convergence or Competition?
Radio Spectrum Management in Guatemala
and Latin America”
June 9th and 10th, 2005
Francisco Marroquín University
Guatemala City, Guatemala
The opinions expressed here are those of the
authors and do not represent the views of any of
the institutions with which they are affiliated.
Liberalization Is Not Always Popular,
Two Latin American Countries
Lead the Way
Comments on a report by Ronald Coase and other
economists at the Rand Corporation, circa 1960:
“This is a remarkable document… Time somehow
has left the authors behind. They ignore the
social, cultural, and political values which have
come to inhere in mass communications, in
particular, broadcasting, as well as fifty years of
administrative law developments… I know of no
country on the face of the globe – except for a
few corrupt Latin American dictatorships – where
the ‘sale’ of spectrum could even be seriously
proposed.” (Coase, J. L. & Econ. Oct. 1998)
The Guatemalan Spectrum
Privatization Experiment:
Why It’s Important
1. Offers “proof of concept” for spectrum
privatization (Coase 1959)
2. Reform by legislation, not regulation
3. Offers evidence in understanding optimal
property rights regimes – how to define
the rights, how they work or don’t work.
- These lessons are applicable to both
developed and developing countries.
Guatemala’s Reforms:
The Short Story
• Private property rights defined sparingly
• Dispute resolution is mostly a minor factor;
incentives exist to overcome interference
• The mobile telephony market shows that
Guatemala has been relatively successful
in promoting consumer welfare
The Guatemalan Experience
• Guatemala: In 1996, the Ley General de
Telecomunicaciones allocated spectrum in
three categories:
1. reserved for government use
2. reserved for amateurs
3. ‘regulated’ (liberalized) bands
The Reserved Bands
• For government use: 1,335 MHz in total
[1000 MHz reserved from 3 MHz to 3000 MHz]
• For amateur use: 4,761 MHz in total
[about 12 MHz reserved from 3 MHz to 3000 MHz]
These parties receive an AUF - autorización de uso
de frequencia - which cannot be sold or transferred
The ‘Regulated’ or Liberalized Bands
Parties receive a TUF – título de usufructo
de frecuencia – which can be traded and
has flexibility under technical constraints
TUFs describe: schedule of operation, area
of operation, max transmission power, and
max interference at border of coverage area
TUFs v. Licenses
• In general, a spectrum license is a right to
a particular use. With some spectrum, a
licensee may choose among several uses.
• A TUF is essentially a property right, with
the freedom to use the spectrum as one
sees fit, subject to technical restrictions.
Allocating TUFs
• Parties submit requests, government must
publicly announce request in three days
• Only reasons for denial: violation of int’l
treaties, or existing right is held by another
• Third parties may oppose, but must do so
within 5 days of end of public announcement
• Within 15 days, an auction is announced,
which takes places within 20 days
El Salvador
Reform, functionally similar to Guatemala
• Also enacted via statute, not regulation
• Grants concessions, not TUFs, but they
are very flexible
• Left ITU spectrum allocation template in
effect but enacted rule change to permit
full flexible use in licensee’s allocated
frequency space
El Salvador
Concessions describe: schedule of operation;
area of operation; nominal power of transmitting
stations; maximum intensity of the electrical field
surrounding the covered area; modulation type;
the type, gain, and pattern of the radiation of the
antennae of the transmitting stations; the type,
gain, and pattern of radiation of the antennae of
the receiving stations in the event they must be
protected; the altitude and location of antennae
above ground and above sea level…
Guatemala: TUFs Auctioned and Traded
TUFs AUCTIONED
1590
160 0
14 0 0
120 0
10 0 0
794
80 0
64 6
60 0
400
30 8
20 9
20 0
24 0
63
84
51
0
1996
1997
1998
1999
20 0 0
20 0 1
20 0 2
20 0 3
TUFs traded: 1,621 (or 41 percent of total)
20 0 4
Results: Mobile Telephony
Source: Superintendencia de Telecomunicaciones (SIT)
3,168,256
2,034,777
1,577,085
1,132,121
1,146,423
429,712
856,831
610,701
517,000
845,968 944,140
676,631 756,085
338,490
64,194
1997
111,445
1998
1999
Telefonía Fija
2000
2001
2002
2003
Telefonía móvil
2004
Guatemala’s Subscriber Growth:
Best in Latin America
Average Annual Growth Rate for Cellular
Subscribers, 1997-2002 = 89.7 percent
(Source: International Telecommunications Union)
Guatemala Has One of the Lowest Mobile
Telephony Rates in Latin America
• per-minute mobile rates, in-country,
approximately US $0.12 (per ITU)
Spectrum Allocation to Mobile Telephony
in Latin America
200
150
100
50
0
Guatemala’s Low Prices
Are Statistically Significant
Liberalization and Wireless Growth Across Latin America
(Dependent Variable is Growth Rate of Total Wireless Traffic)
RHS Variables
Model 1
Model 2
Model 3
Model 4
-597.28
(1.17)
-1013.7
(1.66)
-185.63
(0.43)
-246.07
(0.54)
-3.26
(1.39)
4.767
(0.66)
-2.90
(1.19)
-5.176
(1.10)
Average Price of Wireless service
(US$/min)
-2091.6
(6.92) a
-2161.2
(7.28) a
-2196.6
(7.34) a
-2133.9
(6.40) a
Liberalized Spectrum
1411.8
(7.80) a
1669.3
(6.04) a
1454.7
(7.94) a
1368.3
(5.56) a
Lag Level of Fixed Line Penetration
-40.49
(3.28) a
-23.03
(1.21)
-43.23
(3.50) a
-46.40
(3.18) b
GDP (billion US$)
0.149
(1.35)
0.372
(1.73)
Fixed Line Price of Local Call (3 min)
Growth of GDP per capita
GDP per Capita (PPP US$)
R-Squared
No. Observations
-104
(1.18)
0.027
(0.55)
0.973
0.971
0.972
0.973
30
30
30
30
Market Share, Mobile Telephony
Source: Superintendencia de Telecomunicaciones (SIT),
as of December 31, 2004
Telefónica
14.90%
Bellsouth
12.32%
Sercom
42.41%
Comcel
30.37%
What Consumer Welfare Gains
Really Mean
Results: Broadcast
The Perennial Special Case
• Existing broadcasters until the end of 1996
received free TUFs
• Additional parties could apply, subject to
the non-interference rules
• For TV and radio, spacing extremely tight,
allowing for more users. Exactly 50 TUFs
in the FM bands: 88.1, 88.5, …107.7
Problems with the
Guatemalan Experiement
• Not many, as predicted by critics
• No “chaos in the market” – especially in
the highly valued mobile telephony uses
• Still a need for enforcement, especially
with TUFs used for broadcasting
• Thus, still a potential for political discretion
(but this is lower than other countries)
Outstanding Issues:
Protecting Property Rights,
Avoiding Political Discretion
Example: Pirate Radio
Pirate Radio:
Unauthorized use of spectrum, especially
pirate radio, has been a problem. At one
time, estimates of up to 400 pirate users
within Guatemala.
Authorized users argue that Guatemalan
regulator, the SIT, faces political pressure
to not enforce against illegal users.
Political Discretion:
When there is political discretion, rights are
not well-protected, and incentives for
efficient use are lessened as a result.
Guatemala has very little of this problem, as
compared to most any other country. The
lack of enforcement against pirate radio is
the only significant exception.
Lessons for Policymakers:
→ increasing the rights associated
with the spectrum increases use
and efficiency …
→ which creates consumer benefits
→ but rights must be protected…
→ against other users, and against
rent appropriation, and
The Overlooked Lesson:
Flexibility is Feasible and Efficient, and
Property Rights Do Not Mean Chaos
• With the traditional approach, regulators
determine what services are appropriate
for given bands. A licensee can offer only
those services that are allowed.
• Guatemala turned this approach on its
head. Regulators determined the broad
technical rules. A licensee can offer any
service that is consistent with these rules.