Discussions
Infrastructure Services, Regulation and Competition
JB Cronjé, a tralac Researcher, discusses Infrastructure Services, Regulation and Competition.
The Declaration Launching the Negotiations for the Establishment of the Tripartite Free Trade Area among the Member States of the Common Market for Eastern and Southern Africa (COMESA), the East African Community (EAC) and the Southern African Development Community (SADC) provides for a “developmental integration” approach to the establishment of the free trade area that “combines market integration, infrastructure development and industrial development, as the three key pillars for sustainable development”. The priority areas identified for the development of regional infrastructure programmes include energy, information and communications and transport.These services are mostly provided through networks, including fixed line telephony, electricity transmission and gas pipelines.
The reasoning behind regional infrastructure development is to increase interconnectivity and competitiveness. This would create benefits to consumers (e.g. lower prices, better quality) and the economy as a whole in terms of growth (i.e efficient investment, better resource allocation, higher productivity). However, this requires market access to new service suppliers to enter the market and appropriate regulation enabling them to utilise these market access opportunities on a level playing field.
Many infrastructure industries have economies of scale and scope in some or all parts of their operation which poses significant policy challenges. The existence of natural monopolies is a common feature of many infrastructure sectors, but it is important to unbundle those parts of the supply chain in which competition can be developed. The challenge is to ensure that the monopoly service per se as well as monopoly inputs to possible competitors are provided effectively and efficiently. The optimal supply of network infrastructure services depends on the way the network infrastructure is managed and its uses regulated.
The World Trade Organization’s General Agreement on Trade in Services (GATS) contains specific disciplines on the behaviour of monopolies in those sectors in which countries take commitments. In particular, countries must ensure that a monopoly supplier does not abuse its monopoly position in cases where a monopoly competes with other suppliers on the supply of a service outside the scope of its monopoly rights.
Opening infrastructure sectors for competition must be accompanied with the appropriate regulatory structure to ensure that competitors get access to essential facilities on reasonable terms. This is important because the monopoly incumbent can impede market access to up- or downstream activities in the absence of appropriate regulation, despite the liberalising intent of a particular commitment. Moreover, the GATS provides that domestic regulation on, for example, licensing requirements and technical standards must be based on objective and transparent criteria and not more burdensome than necessary to provide the service and do not in themselves constitute an impediment to trade.
The liberalisation of a network industry necessitates the allocation of various regulatory functions. For example, it is necessary to determine which entity is responsible for the physical management of the network (e.g. maintenance and construction). The conditions of access to and use of a network must be described. In addition, conditions on interconnectivity, public service obligations and rules on conflict resolution between the different users of a network all require the existence of a proper regulatory framework. These various regulatory functions could be allocated to different institutions, for example, independent sector specific regulatory authorities could be tasked to enforce sector specific rules whereas the role of a competition authority would be to guarantee that this is done in a non-discriminatory way. The purpose of the last-mentioned entity is to ensure or maintain, and that of aforementioned entity is to actively promote, effective and sustainable competition.
Trade negotiations can facilitate necessary regulatory reforms and contribute to a successful outcome.
Sources:
Groebel, A. 2011. Competition policy and pro-competitive regulation in network industries – avoiding overkill and gaps. Network Industries Quarterly, 13(1), pp. 7-10.
Nahrath, S. , Pflieger, G. , Varone, F. 2011. Institutional Network Regime: a new framework to better grasp the key role of infostructure. Network Industries Quarterly, 13(1), pp. 27-30.
Dee, P. and Findley, C. 2008. Trade in Infrastructure Services: A Conceptual Framework. In: Matto, A. , Stern, R.M. , Zanini, G. eds. A Handbook of International Trade in Services. New York: Oxford University Press, pp. 338 – 355.