GT&T Operating Licence: Putting monopoly service provision in perspective

For more than a year the monopoly enjoyed by the Guyana Telephone and Telegraph Company in international voice and data transmission has come under scrutiny and attracted comments from government officials including President Bharrat Jagdeo. More recently, GT&T’s competitor in the cellular service industry, DIGICEL, has weighed in with comments of its own on the GT&T monopoly.

Stabroek Business has agreed to publish the following detailed article prepared by GT&T titled “GT&T Operating Licence: Putting Monopoly Service Provision Into Perspective.

The Historical Context

Until the 1990s, the telecommunications industry was widely regarded to constitute a natural monopoly and there was little desire anywhere to replace these private or public monopolies with competitive service provision. This is hardly surprising since a natural monopoly arises in situations where the prevailing level of technology makes it possible for a single firm to supply a good or service to an entire market at a lower cost than numerous firms could. Historically, the fixed costs of establishing a telecommunications business [switch acquisition, build out of national distribution network, etc.) were prohibitive and constituted a barrier to entry. However, having made that investment, there was great scope for the realization of economies of scale over a broad range of services.

Today, thanks to the revolution in information and communications technologies, the natural monopoly status of the telecommunications industry appears to have abated. However, when the Government of Guyana in 1990 moved to privatize the then state-owned monopoly Guyana Telecommu-nications Corporation (GTC), given the abysmal state of the telecommunications infrastructure in Guyana, as well as the small population size and low per-capita income levels, it was rational, indeed necessary, to agree to grant the new company, Guyana Telephone & Telegraph (GT&T), a monopoly licence. Given the limited interest shown in the privatization at the time, it is clear that investors would have deemed the investment opportunity unattractive had the Government sought to split company along geographic and / or service lines or otherwise acted to limit reasonable investment returns by implementing an open-entry policy on a “flash-cut” basis.

Telecom sector liberalization began in earnest for developed countries in the 1980s and 1990s. This period saw the United States, Canada and the countries of the European Union (EU) initiate ambitious programmes to liberalize their telecommunications sectors. These initiatives were possible because technological innovations had made telecommunications markets and services contestable. Equally important, however, is that a new development paradigm had come to prominence through the advocacy of the developed economies and supranational institutions like the World Trade Organization (WTO). This paradigm postulates that i) the telecommunications sector is crucial to the development of ICTs as a whole and central to the development of the entire economy, and ii) liberalization of the telecommunications sector facilitates dramatic improvements in ICTs and enhances a country’s economic and social prospects.

In February 1997, 69 members of the World Trade Organization (WTO) (representing the equivalent of 93 percent of the trade in global telecoms service) agreed to open their basic telecoms markets to competition subject to country-specific commitment schedules. And by February 1998 the WTO’s Basic telecommunications Agree-ment (BTA) came into force, providing a framework for the gradual liberalization of market access and establishing a regime of regulatory principles to guide the reform of telecommunications markets.

The liberalization timeline in the developed countries merits highlighting. The new Telecommunications Act of 1996 ushered in competition in the provision of local telecommunications services in the United States. In the case of Canada, whereas the long-distance market was liberalized in 1992, local telecommunications service was not open to competition until 1997. In the case of the European Union, member states were ordered to begin opening their markets as of January 1998. In some cases, there is concern that developed countries moved too quickly to implement market-opening initiatives, and in several countries, including the United States, there has been a backlash in recent years as certain initiatives have been limited or even pared back. There is a growing perception that liberalization promotes the public interest only when it is pursued carefully within the context of a specific country’s laws and history so that it promotes rather than retards the development of a modern infrastructure.

As one would expect, certain developing countries have begun to consider liberalization initiatives. In Jamaica, the 3-phased liberalization process began in 1999 and ended in March 2003. In the OECS, the process ended in 2001. In Barbados, the 3-phased process began in October 2001 and ended in February 2005. In Trinidad and Tobago, the entity with responsibility for liberalization and regulation of the sector, Telecommunications Authority of Trinidad and Tobago (TATT), became operational in July 2004 and the liberalization process is progressing. In each case, liberalization occurred within the specific context of each country’s markets, laws, demographics, and level of infrastructure development.

The liberalization process must involve all stakeholders but the lead role belongs to Government. Government articulated its intention to liberalize Guyana’s telecommunications sector as early as 2000. In fact, the “Consultation Paper on Issues and options for Reform of the Telecommu-nications Sector” is dated August 2001. Over the period 2000-07 Government has benefited from the services of at least three International Telecommunications Consultants and at every step of the way GT&T and its parent company Atlantic Tele-Network (ATN) have afforded Government their fullest support and cooperation. One must therefore conclude that the timing of the commencement of the liberalization of the market is something Government reserves the right to decide on in its own wisdom.

We do not profess to subscribe wholeheartedly and blindly to the new paradigm. In particular, developing countries such as Guyana face unique exigencies which the United States and other developed countries do not face, and those exigencies must be taken into account when devising appropriate telecommunications laws and policies. But we do recognize that liberalization, if well conceived and implemented in a way that respects all parties’ legal rights, can result in benefits such as increased foreign direct investment, greater access to telecommunications services, infrastructure development, improved quality of service and greater customer choice and lower prices.

GT&T’s operating licence

GT&T’s operating licence is a virtual replica of the license held by British Telecoms prior to the liberalization of the British telecommunications sector. That licence authorizes GT&T to provide or undertake the following services on an exclusive basis for a period of 20 years renewable: i) public, radio, and pay station telephone, national and international voice and international data transmission, ii) sale of advertising in any directories of telephone numbers, and iii) switched or non-switched private line service supported by facilities constructed over public right of way. GT&T’s licence also authorizes the company to provide terminal and customer premises equipment services, and telex and telegraph services on an exclusive basis for a 10-year period.

Recognizing the imperative of effective regulation, Government instituted a regulatory model that sought to promote consumer welfare and minimize the potential for abuse of market power. Regulation aims also at promoting fair competition (where competition is permitted), providing the utility with incentives to improve efficiency, permitting sh
areholders a reasonable rate of return, and ensuring the adequacy of the utility’s funding. The arrangements for telecommunications regulation in Guyana rest primarily on i) the Telecommunications Act of 1990, ii) the Public Utilities Act of 1999, iii) the Sale Agreement between Government and the Investor (ATN), and GT&T’s operating Licence. The main provisions of the Agreement concern i) the scope of GT&T’s operating license, ii) the primacy of the Agreement over the other regulatory instruments, iii) conditions relating to pricing (including the guaranteed rate of return and its computation) and iv) services provision (including an agreed expansion plan).

Our detractors either do not know or choose to forget that GT&T’s operating licence is designed to have the international business subsidize the provision of local services. It is sometimes easy to forget that Guyana’s citizens have benefited for many years from local telephone rates that are much lower than the rates paid by subscribers in other Caribbean nations. This subsidy policy not only promotes universal service in Guyana, but it allows GT&T to be a net earner of foreign exchange from its international business while using these resources to expand the domestic telephone network.

It also is easy to take for granted the tremendous infrastructure build-out that occurred in Guyana after the privatization in 1990. The country has seen fixed access lines grow from a paltry 11,000 in 1990 to more than 125,000 today, while cellular service, which did not even exist in 1990, now has more than 300,000 customers on GT&T’s network. The national network is now fully digitalized, and all subscribers have full international and broadband connectivity. Those people who remember what the telephone system was like in 1990 know what a remarkable achievement this has been. But it has not occurred for free, and GT&T would not have invested the more than US$150 million required to build-out this infrastructure without an exclusive franchise to provide basic telephone services. It is not a stretch to say that the 1990 privatization is the single most successful telecommunications policy in the history of Guyana.

As Guyana and other developing countries move forward with liberalization, it is important to remember that developed countries have accelerated their own liberalization efforts only after their national infrastructure was fully built and paid for. For many developed countries, this process took not just years, but many decades. Of course, technological development has condensed the amount of time necessary to build-out a modern infrastructure today. Nevertheless, liberalization must be viewed in the context of infrastructure development. If liberalization is pursued reflexively, and without providing the proper incentives for efficient network build-out and foreign investment, the country could be worse off in the end.

There is more competition

here than meets the eye

Instructively, GT&T’s operating licence does not grant the company a monopoly over all telecommunications services in Guyana. Government always intended to have the cellular market remain open to competition. Thus, whereas meaningful cellular competition in the form of Digicel Guyana Ltd only arrived here in 2005, to date, government has also issued cellular licences to i) Caribbean Telecom-munications Limited (April 1996), ii) Caribbean Wireless Telecom, LLC. (April 2000), and iii) Cel*Star Guyana Inc. (February 2001) [some of these licences may have since been cancelled]

In the area of international telephony, the current reality is that GT&T no longer enjoys the exclusivity conferred by its operating licence. This is so in part because of the ubiquity of the Internet and the ease with which it supports telecommunications service provision and in part because of the reluctance here to enforce the law and to monitor and enforce compliance with licenses. The fact is that today GT&T competes with numerous illegal very-small aperture terminal (VSAT) operators, thousands of small Internet cafes and a variety of alternative international calling systems [e.g. the Yap Jack, Vonage, Tidal Wave, Skype] for inbound and outbound international minutes. However, although international best practices suggest that regulation be technology neutral and treat equivalent services similarly, it is only GT&T that is subject to regulatory scrutiny.

Ironically, many of the services that compete with GT&T’s international business utilize GT&T’s underlying infrastructure for free. It is also true that many of our competitors operate below the tax radar. Observe, for example, that although Government has imposed 16 percent VAT on all telephone calls, the Skype, Vonage, Yap Jack calls and calls from Internet Cafes do not attract VAT. In several Caribbean countries, restrictions are placed on the use of these services and equipment. In addition to circumventing government imposts, it is useful to observe the business model of these illegal telecommunications operations. They utilize foreign exchange to purchase minutes from international carriers to operate a service that runs on Internet bandwidth purchased with foreign exchange. They sell these minutes here for Guyana dollars. In other words, these operations are all net users of foreign exchange.

Based on our current laws and regulations this competition is illegal and unfair, but it is very real and is allowed to thrive unchallenged.

There is active competition in the Internet Service Providers (ISP) market. However, based on the operating licence issued to GT&T, the company is the sole operator with authority to purchase Internet bandwidth from the Internet Backbone Access providers in North America and Europe. Government and GT&T have also collaborated to facilitate the licensing of non-interconnected (VSAT) operators to provide international connectivity to call centres. However, the current reality, of course, is that the illegal Internet bandwidth providers, who operate VSAT equipment either without a license or in violation of the license with which they are issued, are competitive service providers. They do not pay the same NFMU fees that GT&T is required to pay, and they often cause interference with lawful uses of wireless frequencies.

There is competition too in the markets for customer premises equipment (CPE) (i.e. telephone sets and other terminal equipment]) GT&T actively promotes such competition and has also been encouraging the Regulator to endorse competition in the inside wiring business.

Of the core services covered by its licence, the only ones with no challenge on the horizon are the provision of access, distribution and local service. GT&T remains the only operator with a carrier-of-last-resort obligation to promote universal access to telephone. GT&T has always taken this obligation very seriously and continues to discharge this contractual responsibility. However, precipitous declines in the termination rates that GT&T receives for international calls, failure to achieve local rate rebalancing, and increased competition for international traffic are penalizing GT&T for continuing to discharge its responsibilities.

The challenges notwithstanding, we continue to view the future with optimism. We have the competences and the commitment to succeed in a new dispensation. We recognize the Internet for the “disruptive” technology it is and appreciate that it has to be accepted. We are aware that the new telecommunications paradigm has won international support and that telecommunications sector liberalization in Guyana is beneficial if handled correctly. This is why GT&T has consistently articulated its preparedness to work with government to modernize sector laws and regulations.

We insist on respect for the laws, fair treatment for ourselves, and that the winners are decided in the market place. We believe that negotiation is the only way out of a negotiated agreement. We believe it is critical that liberalization establish incentives for the construction of new ne
tworks and infrastructure in Guyana, not just profit opportunities for providers hoping to make a quick buck providing services over networks that other parties have built and paid for. We believe in respect for licences issued and protection for the holders of such licences. We do not endorse the obviously problematic view that abrogating the contractual and licence rights of companies represents a viable option. Regrettably, telecommunications operators here have acted in violation of their licenses and that of others for so long that they now appear to interpret liberalization and the introduction of competition to mean a “free for all.” The truth is that without licences and their enforcement there is little future for the sector.

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