World Dialogue on Regulation

The case study and annexes are available in Spanish. 
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Although investment trends are influenced by many national and international factors, during last decade, investment flow behaviour in the Chilean telecom sector has been affected in particular by regulatory actions. Reforms have stimulated investment, creating openings for new business as well as improving observed trends in the already more dynamics ones.

The selected evaluation periods (1994-1998 and 1999-2004) coincide with key regulatory events in the sector, as well as with important changes in investment flows. In particular, in 1994 the telecom law was reformed in anticipation of the opening of the market, particularly for long distance. Further key events for these periods of analysis include the establishing of regulated prices for the dominant operator from May 1994 to May 1999; PCS mobile phone concessions beginning to offer services between 1998 and 1999; implementation of “Calling Party Pays”; and tariffs for the dominant operator established for the period from May 1999 to May 2004.

Telecom investment flows were on the increase until 1997, with more than USD 1,000 million for that year. From 1997 to 1999, a slight reversion in the trend was observed due to an overall decrease in economic activity. However, for 2000 there was again an improvement resulting in a higher investment level than for any other year during the 1990s. During 2000, investment in the sector reached about USD 1,120 millions, with 40% allocated to mobile infrastructure improvements.

During 1994-1998, increases in fixed local lines took place during a period of uncertainty produced by a new legal framework involving technical and tariff aspects of interconnection that restrained new entrants. This situation resulted in an unsatisfactory evaluation of four out of the five dimensions of examination. Despite legal changes, interconnection between local companies was subject to imbalanced negotiations between operators and only dominant operator investments benefited. The former monopoly of long distance communications, especially international calls, was weakened by competition and the end of cross-subsides.

The first period of assessment for mobile telephony (1994-1998) can be understood as the beginning of competition due to the development of regulations to introduce new competitors and to generate cost based pricing conditions for interconnection with local operators. The precarious level of regulations is evident in the results of the evaluation of the regulatory environment, with the exception of free public tariffs, which was evaluated in a positive way. During this period, mobile incumbents made investments to protect their position from new entrants; in fact, they digitalized their networks and introduced alternative market forms – in particular, prepaid – in order to attain better conditions before the granting of new PCS concessions in 1998.

The period 1999-2004 was especially complex for local telephony, because despite an improved TRE, in particular pertaining to market entrance and interconnection, this period was marked by an international contraction of the sector. However, the higher efficiency imposed by the regulator on the dominant operator in 1999 tariff regulation, and which was strongly resisted, allowed the cable operator to take advantage of economies of scope and capitalize on the new regulatory environment. This resulted in growth during the 1999-2004 period and demonstrated clear leadership in introducing new technologies. By the end of the period, competition was characterized by the deeper maturity of the market and a slower expansion.

For mobile telephony, the environment improved in a significant way, stimulating investment. Between the two periods assessed, there was a qualitative leap in regulation. The entrants had effective regulations and both sector and anti-monopoly regulatory activity allowed development and growth to the extent that investment in the mobile segment reached and quickly exceeded that of the local segment. Interconnection and tariff conditions improved significantly, as well as the entrance to market with the new licenses and the additional aspects imposed by the authority.

In short, between the two periods of assessment there was an important change in the composition of investments due to a beneficial environment and conditions of higher certainty around interconnection and pricing. Moving beyond twisted pairs, the mobile and cable networks became more relevant towards the end of period. In this context, participation of the dominant local operator suffered an important decline. Cable and mobile phone competition were consolidated. The TRE methodology used in this case study provides a broader understanding of the impact produced by the new regulatory measures.