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Cartels in telecom sector

October 11, 2012

ACCORDING to news reports all 14 Long Distance International (LDI) operators working in Pakistan have agreed to create a clearing house for international call termination.

The agreement was encouraged by the Ministry of Information Technology and has the blessings of Pakistan Telecommunication Authority as well as other relevant authorities. These authorities contend that such a clearing house arrangement, though clearly a cartel, will stop the price war between providers, fix prices and bring more foreign currency into Pakistan. There has been some mention of security concerns also being served by the creation of this clearing house.

What has been ignored has been the voice of the consumer. Price wars are great for consumers. One reason the telecommunication sector developed fast in Pakistan and call prices came down significantly was the entry of many players and the tussle between them for customers and traffic.

We have been boasting of 100 million plus cellphone connections, a mobile network and penetration close to what is found in some of the more developed countries, an explosive and rapid increase in the number of Internet users and a good quality infrastructure in the area. This has been the fruit of a fairly open policy where many firms have had to compete hard for customers. Will the clearing house undermine some of the benefits of competition?

The Competition Commission of Pakistan (CCP) evidently thinks so. An opinion on the matter, available on the CCP website, states that under the proposed international clearing house  (ICH) arrangement, “all incoming traffic in future will terminate on the PTCL infrastructure. The inbound traffic is significantly more than the outgoing traffic, so will lead to less incentive to use international bandwidth from PTCL’s competitor(s) and the proposed ICH arrangement would not only eliminate competition but also further strengthen PTCL’s dominant position. Prior to deregulation in this sector bandwidth rates were very high and with competition have come down to competitive levels, both for voice and data, which can run the risk of going up once again.”

The IT ministry’s advice to form a cartel is anti-competition and clashes with the competition laws of the country. Although the CCP advised that the directive should be withdrawn, the body does not have teeth and so it seems that over time the cartel is all set to come into being.

The cartel agreement fixes prices as well as shares of the various existing players. Given that call termination would involve the use of the PTCL infrastructure, the move would give too much power to the telecom company. Price-fixing will hurt the consumers directly as existing rates would go up. And the cartel would also encourage further development of the illegal termination market as customers would try to avoid higher charges.

One can understand the incentive of existing players to form a cartel: they get higher revenues from existing market shares, do not have to compete and need not be innovative in their work. They might lose some traffic to illegal suppliers but they must think that the loss of traffic will be less than the gains they accrue from getting higher fixed prices within the cartel.

But this is true for any bunch of oligopolists. If they could form a cartel and become a monopoly, effectively, they would gain but at the cost of the consumer and at the cost of innovations within the industry. Why should we oblige this set of oligopolists?

Regulators have mentioned that a single clearing house will help monitor all international call traffic and that this will help with security issues. But this seems to be a red herring. The same scrutiny could be applied to international traffic if there was no single clearing house as long as termination is through legal providers. And the shift to illegal markets is likely to take place under a price-fixing cartel. So, security concerns cannot be a reason for establishing the cartel.

There are legal issues here too. Should the security apparatus of the country have the ability to monitor all international calls? Are citizens not entitled to any privacy under the basic rights provided by the constitution? It would be interesting if this point of view of the supporters of this cartel were brought before the courts for debate.

It is pointed out that international call termination is lucrative business and a large market. With millions of Pakistanis/Pakistan-origin people working/living outside, it is a business worth billions of dollars. By forming this cartel, which raises prices by a few cents, Pakistan could get as much as $500m a year more. Imagine the size of the overall market.

And, if the grapevine is to be given any credence, there have always been a number of very influential and powerful Pakistanis who have been involved in the business of call termination albeit on the illegal side. They have either had illegal exchanges of their own or have facilitated operators of such exchanges. And they have made millions of dollars.

Does the cartel have anything to do with the influence of these individuals and/or operators? There have always been rumours that PTA and other authorities have been quite lax in finding and closing down these illegal operations and prosecuting the culprits. Or, they have been very selective, favouring some over others.

The cartel, while it will make money for current producers, will also raise incentives for developing illegal alternatives. Is this a win-win for all players at the cost of the consumers within the country and Pakistanis living abroad?

Given the doubts about the arrangement, and especially in light of the CCP’s advice, a consumer group should challenge the formation of this cartel in court. The authorities supporting the cartel formation need to show, to the courts and the people, that the merits of the case outweigh the costs in terms of loss of competition, cost to the consumer, and increased incentives for diverting business to illegal channels.

Cartels are sometimes justified, but only if the benefits to the people outweigh the costs. This does not seem to be the case here.

The writer is senior adviser, Pakistan at Open Society Foundations, associate professor of economics, LUMS, and a visiting fellow at IDEAS, Lahore.