Regulation and Investment: Sri Lanka Case Study

Rohan Samarajiva (Ministry of Economic Reforms, Sri Lanka) & Anupama Dokeniya (World Bank)*

Discussion paper WDR 0303a

Executive Summary

This paper examines the investment patterns in Sri Lanka’s telecom sector and attempts to explain them in the context of the sector’s regulatory environment based upon assessments of perceived regulatory risk.

The authors provide a detailed analysis of the 'Telecom Regulatory Environment', across five dimensions of regulatory risk (market entry, access to scarce resources, interconnection, tariff regulation, regulation of anti competitive practices), over three time periods (1993-96; 1997-99; 2000-02) for the fixed and mobile sectors. The investment patterns in the sector over the three time periods are then analytically examined, with respect to the corresponding assessments of the regulatory environment. The summary assessment for each dimension is expressed on a five-point scale as poor, unsatisfactory, neutral, satisfactory and excellent.

Sri Lanka initially embarked on telecom reforms in 1980 with the bifurcation of posts and telecom service provision by the government. Subsequently in 1991 the creation of a regulatory authority and the conversion of the Department of Telecommunications into a corporation further developed this process. Since 1991 numerous operators have been licensed including three fixed operators, four mobile operators, over five facilities based data operators, over 20 non facilities based data operators and over 30 external gateway operators; an excess of USD 1300 million has been invested in the sector with fixed teledensity increasing from below 1 to almost 5; mobile teledensity has increased from below 0.1 to over 5 and today the telecom sector is one of the highest growth sectors in the economy.
Given Sri Lanka’s relatively long experience in telecom reforms, relative to most developing countries, a detailed analysis of the telecom regulatory environment and investment patterns yields useful insights into the processes that drive action in this context. In particular the fluctuating regulatory environment between 1993 and 2002 provides an interesting case study for regulatory impacts on investment in the telecom sector.

In the fixed sector, despite some evidence of exogenous government determination of investment by the incumbent after privatization, the regulatory environment appeared to have some impact on investment decisions in the sector. For instance an initial boost in investment growth coincided with the replacement of the first, not-fully-independent regulator with the Telecommunications Regulatory Commission (TRCSL) in 1996, vested with better resources and greater autonomy and the licensing of two fixed access operators. Whilst the regulatory environment was not perfect, the hope of good regulation created by the 1996 legislative amendment and the early actions of the TRCSL were seen as justifying investment. Consequently incremental investments in the fixed sector were highest around this time. However, the subsequent deterioration of the interconnection regime, the actions as well as inactions on the part of various government entities, contributed to fixed sector investment slowing in 2000 and by 2002 the extraordinary growth of the fixed network were overtaken by the mobile sector, despite the existence of massive unmet demand.

In contrast, the mobile sector during the period of this study experienced an overall growth in investment mostly attributable to a relatively good regulatory environment – due to a better interconnection regime with the TRCSL issuing and implementing a fixed-mobile interconnection determination and related tariff decisions in 1999. Technological changes also warranted further investment. However, it may be surmised that had the intended Calling-Party-Pays regime been implemented, along with the remaining elements of the interconnection regime and the 1800 MHz frequencies cleared and allocated on schedule, investment in the sub-sector may have been even higher.

* Not in official capacity

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Document Date:
February 2004
Author:
Rohan Samarajiva & Anupama Dokeniya
Discussion Paper No.:
wdr0303
Pages:
15 pp
Title:
Regulation and Investment:
Sri Lanka Case Study
Collection Title:
World Dialogue on Regulation for Network Economies

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Regulation and Investment: Sri Lanka Case Study

Rohan Samarajiva (Ministry of Economic Reforms, Sri Lanka) & Anupama Dokeniya (World Bank)*

Discussion paper WDR 0303a