Dialogue: Regulator will slow information economy

LOCKWOOD SMITH* says more regulation of telecommunications might discourage investment and stifle development.

Between 1995 and 1998, information and communications technology was responsible for more than a third of the growth in the booming United States economy. Within five years, some say, the sector could employ nearly half the American workforce.

These developments are also opening up exciting new possibilities for growth and jobs in New Zealand. But there is a risk that Government policy may stifle them.

The Fletcher telecommunications inquiry has just recommended more regulation for telecommunications in New Zealand. The Government will now have to make some vital decisions. This is crunch time.

The Fletcher inquiry recommends the Government establish an electronic communications commissioner, an industry-specific regulator with wide-ranging powers.

At the same time, the Caygill inquiry into the regulation of our electricity industry has headed in the opposite direction. It has recommended a more generic approach with enhanced powers for the Commerce Commission.

The central issue is this. Do you have a regulator making decisions for the industry or do you have the industry pursue commercial decisions knowing that if dominant players abuse a position of power, they can be disciplined by the Commerce Commission?

It may not sound a huge difference but the impact on investment in this vital sector, and the extent to which the sector becomes a driving force in a rapidly growing economy, may very much depend on this decision.

Comparing the electricity and telecommunications industries, it could be argued that greater regulation is needed over electricity distribution.

It is hard to envisage new technologies developing to compete with power lines for delivering electricity. In contrast, evolution in telecommunications technology is accelerating with cellular and satellite developments competing with wire.

Where you have no competing technology, the risk of abuse of a position of power is much greater. On economic grounds, therefore, it's difficult to reconcile an intrusive approach in telecommunications with a self-regulatory approach for electricity. It's unlikely they are both right.

Other countries have set up telecommunications regulators and the outcomes are instructive. In Germany the regulators have been a growth industry, now employing more than 2500 bureaucrats. That is 10 times more than the number required to look after competition in all other sectors of the German economy.

While that army of bureaucrats has reduced the cost of call charges for private households in Germany over the past two years by almost 20 per cent, a comparable figure in New Zealand has been almost 37 per cent - almost twice the reduction in prices to consumers without the cost of the army of bureaucrats.

The Australian experience with an industry regulator is not much more encouraging. A review by the Network Economics Consulting Group found the regulatory regime imposed annual administrative costs of more than $110 million on the industry and even greater efficiency losses.

Supporters of the Fletcher inquiry argue that the proposed New Zealand regulator will be kept small. But it was the same in Australia. Originally, it was hoped that problems of excessive regulation would be avoided through industry self-regulation. It hasn't happened.

More and more elements of the industry have come under the regulator's control, reducing the incentive for investment in new network technologies that are essential for development of the information economy.

In fact, the Network Economics Consulting Group Report found that a preliminary consumer welfare analysis indicates that consumer surplus gains since the introduction of competition in New Zealand are 33 per cent higher than those delivered to Australian consumers. Yet New Zealand appears to have achieved these outcomes without the costly administrative burden Australia has imposed upon itself, and without forgoing the efficiency gains associated with significant investment in new infrastructure.

The report found in Australia very little investment in alternative fixed telecommunications infrastructure.

In contrast, New Zealand has received huge investment, such as Vodafone's $300 million in wireless telephone technologies, Telstra/Saturn's $1.1 billion over five years on cable network expansion, Clear's $330 million in a three-year network expansion, and Telecom's $1.2 billion on its Southern Cross project and new CDMA mobile network.

I am not suggesting that no change is required. Improving the framework within which the Commerce Commission operates, giving it the tools to respond more quickly and effectively to the rapidly changing world of the information era, would be a positive move.

But it is interesting to note that Vodafone, today competing against Telecom, and with investments in telecommunications in 20 countries, has argued that the New Zealand regulatory regime has much to show the world.

Many of the key features of the present regime represent regulatory best practice. In particular, we support the use of generic competition law, the lack of industry-specific and active regulatory structures.

Minister of Communications Paul Swain should think carefully before recommending that his Government adopt the Fletcher proposals.

The Government should examine the Caygill proposals at the same time. They just might make more sense.

* Lockwood Smith is the National commerce spokesman.