Beyond privatization : the second wave of telecommunications reforms in Mexico

WORLD BIANK DISCUSSION PAPER MO. Sas WoII i progr'sm tor pubiha dlscusslouw Bjorn IWellenius Gregory Staple . 4  Recent World Bank Discussion Papers No. 271 Small Enterprises Adjusting to Liberalization in Five African Countries. Ron Parker, Randall Riopelle, and William F. Steel No. 272 Adolescent Health: Reassessing the Passage to Adulthood. Judith Senderowitz No. 273 Measurement of Welfare Changes Caused by Large Price Shifts: An Issue in the Power Sector. Robert Bacon No. 274 Social Action Programs and Social Funds: A Review of Design and Implementation in Sub-Saharan Africa. Alexandre Marc, Carol Graham, Mark Schacter, and Mary Schmidt No. 275 Investing in Young Children. Mary Eming Young No. 276 Managing Primary Health Care: Implications of the Health Transition. Richard Heaver No. 277 Energy Demand in Five Major Asian Developing Countries: Structure and Prospects. Masayasu Ishiguro and Takamasa Akiyama No. 278 Preshipment Inspection Services. 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The complete backlist of publications from the World Bank is shown in the annual Index of Publications, which contains an alphabetical title list (with full ordering information) and indexes of subjects, authors, and countries and regions. The latest edition is available free of charge from the Distribution Unit, Office of the Publisher, The World Bank, 1818 H Street, N.W., Washington, D.C. 20433, U.S.A., or from Publications, The World Bank, 66, avenue d'Iena, 75116 Paris, France. ISSN: 0259-210X Bjom Wellenius is the telecommunications adviser in the Telecommunications and Informatics Division of the World Bank's Industry and Energy Department. Gregory Staple is a partner in the communications law firm of Koteen and Naftalin, Washington, D.C. Library of Congress Cataloging-in-Publication Data Wellenius, Bjom. Beyond privatization: the second wave of telecommunications reforms in Mexico / Bjom Wellenius, Gregory Staple. p. cm. - (World Bank discussion papers ; 341) Includes bibliographical references . ISBN 0-8213-3823-4 1. Telecommunication policy-Mexico. I. Staple, Gregory C. II. Title. III. Series. HE7825.W25 1996 384'.041'0972-dc2O 96-43972 CIP  Contents Foreword v Abstract vi Acknowledgments vii Abbreviations and Acronyms viii I. Introduction 1 II. Telecommunications Sector Reform-Phase 1 (1989-1994) 3 III. Telecommunications Sector Reform-Phase II (1995-1998) 5 Context of Reform 5 The Current Agenda 6 Long-Distance Competition-First Steps 6 NewTelecommunications Law 9 Long-Distance Competition Takes Off 9 Competition for the Local Loop 10 Competition forVideo Distribution Services 11 PrivatizingTelecomm's Satellite Business 11 Spectrum Management 12 Regulatory Organization and Process 13 IV. The Road Ahead 15 Attachments 1. Mexico: Telecommunications Services Growth, 1990-1999 16 2. Mexico: Concessions Granted for Long Distance Telephone Services 17 3. Telecommunications Industry Convergence in North America 18 4. Opening Mexican Long-Distance Telecommunications to Competition: Strategic Policy Options 19 5. Telephone Company-Cable Television Cross-Ownership: Implications for Future Competitiveness in Mexico 31 Endnotes 35 References 37 .I.'.   Foreword Mexico successfully completed in 1994 a first phase of telecommunications reforms, including privatizing its state-owned telephone company and establishing the basis for opening the market to competition. Concurrently, global technological changes have dramatically modified the economies of telecommunications networks and the rationale of market structures. Reflecting these changes, and building on the strong foundation provided by initial reforms, since 1995 Mexico has been engaged in a second phase of reform that seeks to modify telecommunications policies strategically, combining open competition with adequate social coverage. The second phase of reform is based on a new telecommunications law that establishes guidelines for an open and efficient competitive market. The new regulatory framework is aimed at promoting nationwide availability, diversity, and quality of services as well as more and better options for the users, at internationally competitive prices . This creates a win-win-win situation for investors, service providers, and customers. Open competition, from Mexico's standpoint, means participation in the market without restrictions on the number of competing telecommunications service providers and without segmenting the market with respect to technologies or types of services. To ensure effective competition, all public telecommunications network operators are required to allow interconnection of other operators to their networks in nondiscretionary, nondiscriminatory, equal-access terms. For that purpose, the regulatory framework will establish procedures and fundamental technical plans that encourage the emergence and growth of new operators and protect the interests of customers. The study by Bjorn Wellenius and Gregory Staple provides a thorough analysis of the present situation in Mexico from their viewpoint, making reference to the past and present developments in the telecommunications environment. It also gives a good understanding of the direction taken and goals sought by the Mexican government. It is clear from this study that, in spite of the impressive accomplishments of the last years, there is yet much to be done. Carlos Casasus L6pez Hermosa Subsecretario de Comunicaciones y Desarrollo Tecnol6gico Secretaria de Comunicaciones y Transportes Mexico v  Abstract From 1989 to 1994 the government of Mexico carried out a major restructuring of the telecommunications sector. Telefonos de Mexico was privatized, and cellular, value-added, and private networks and services were liberalized. In late 1994 the government moved toward further opening up the market, this time liberalizing local, long-distance, and international voice and video, as well as privatizing the government's domestic satellites, auctioning the radio spectrum, and establishing a firm legal and regulatory basis for a fully private, competitive market structure. This paper gives a concise overview of the context, issues, and options for telecommunications policy and regulatory reform in Mexico as the second wave of sector reform unfolds. The paper tracks related key events until around May 1996. VI  Acknowledgments This paper is based on a briefing report prepared in February 1995 by the authors and Francoise Clottes. Attachments 4 and 5 were written by David Townsend and William Malone, respectively. Peter Smith reviewed and commented on all drafts. Charles Jackson and Jorge Valerdi contributed background material on spectrum management and satellites, respectively. Attachments 1 to 3 are reproduced by kind permission of Pyramid Research, Inc., and TeleGeography, Inc. The main report was updated by the authors in May 1996. The team benefited immensely from discussions with Carlos Casasus, Subsecretario de Telecomunicaciones y Desarrollo Tecnol6gico in the government of Mexico, and his senior staff and advisers. vii  Abbreviations and Acronyms AT&T American Telephone and Telegraph Corporation (U.S. carrier) BOT build-operate-transfer BTO build-transfer-operate CAPs competitive access providers CATV cable television DBS direct-broadcast satellites DTH direct-to-home (television satellite) FCC Federal Communications Commission (U.S.) GTE U.S. telecommunications carrier LEO low-earth orbit (mobile satellite systems) MFS Metropolitan Fiber Systems (U.S. carrier) MMDS multipoint multi-distribution service MSO multiple cable system operators NAFTA North American Free Trade Agreement ONA open network architecture ONP open network provisioning Optus Australian telecommunications carrier PCS personal communications services SCT Secretaria de Comunicaciones y Transportes Telecomm Telecomunicaciones de Mexico Teleglobe Canadian international operating company Telmex Telefonos de Mexico VAS value-added service VDT video dial tone VSAT very small aperture terminal Viii  I. Introduction Mexico began in late 1994 a second critical phase of sector reform aimed at liberalizing the market for all telecommunications services. Liberalization will increase the quality and reliability of these services, extend access to many people currently not covered, accelerate innovation especially for business users, and overall increase efficiency and reduce prices. One way or another, some 10 million current customers and perhaps a further 8 to 10 million to be added by the year 2000 will benefit. Sector reform will also stimulate at least $4 billion* in new foreign investment, chiefly for competitive long-distance and local service concessions; further it will generate substantial government revenues from taxes on Telefonos de Mexico (Telmex) and new operators, proceeds from the privatization ofMexico's principal satellite carrier (still state-owned), and spectrum auctions. Since December 1994, the devaluation of the Mexican peso against the U.S. dollar and the ensuing economic contraction have given sector reform a new urgency. The economic stimulus likely from further market liberalization and additional privatiza- tion is now viewed as an integral part of Mexico's response to the currency crisis as well as a continuation of the government's prior commitment to creating a modern, competitive telecommunications infra- structure. The scope and complexity of the sector reforms now underway-multiple new long-distance and local service operators employing a range of wireline and wireless technologies-is placing an unprec- edented burden on Mexico's policy and regulatory body, the Secretaria de Comunicaciones y Trans- portes (SCT). A new communications law was enacted in 1995; regulatory codes are being drafted; and new administrative regimes are being established for deciding on interconnection terms between competing carriers, auctioning the radio spectrum, and managing telephone numbering in a multicarrier environment. The transition to a competitive market structure for basic telephone and video distribution services also is likely to severely test the ability of the government to arbitrate between powerful existing and would-be market participants and thus to maintain the timetable and competitive focus of sector reform. This paper gives a concise overview of the context, issues, and options of telecommunications policy and regulatory reform in Mexico as the market is being opened to widespread new entry and competition. First we briefly review the initial phase of reform (1989-1994), which saw the privatization of Telmex, the liberalization of value-added services and private networks, as well as competition in cellular telephony. Then we outline the main elements of policy facing the sector from early 1995, progress in dealing with them so far, and next steps. Attachments 1 to 3 provide supporting data. Attachment 4 examines in more detail the strategic policy options that were available to the government in 1995 for opening the long-distance market to competition. And Attachment 5 discusses issues of cross-ownership between telephone and cable television companies. *All dollar amounts are current U.S. dollars. 1   II. Telecommunications Sector Reform- Phase I (1989-1994) Sector reform was launched in 1989 at the outset of the Salinas administration. The program induded a number of bold initiatives: