ASi" kUCTURE FlOR DEVELOPMENT

egional gas distributors, and an enterprise owning But in other segments of telecommunications the
the refineries, storage facilities, and transport distinction between vertical and horizontal unpipelines.
The liquid-propane gas operations that bundling is not always sharp. Specialized providers
had been part of OKGT's operations were pnva- sell information services using communication links
tized separately.
owned by traditional network operators. In such
A key part of many rail transport reforms is to cases vertical unbundling between the provision of
separate track management from railway opera- networks and the supply of information services is
tions. For example, in 1988 two rail organizations needed to allow fair competition between horizonwere
created in Sweden: Baverket is in charge of tally separated service operators.
track investment and maintenance, while Statens
Jirnviigar operates the freight concession and pas- Pmctinal approadzes to unbundling
senger transport on trunklines. For its track services,
Baverket receives a fixed charge per tunit of rolling Constraints on unbundling are both technical and
stock plus a variable charge reflecting the social economic Attempting to force activities that are
marginal costs of operation (induding those for pol- closely interdependent into distinct boxes can imlution
and accidents). Separation between track and pose higlh transaction costs as the coordination once
operation is iplicit in many reforms of the rail sec- achieved smoothly within a single firm becomes
tor in developing countries, where specific services, more difficult and less effective when handled besuch
as passenger and freight, are being separated tween firms. And having separate, vertically linked
(see the following discussion on horizontal un- monopolies, each charging a markup over costs,
bundling). To be successful, such reform requires may result in higher charges than with a single, verthat
operators be allowed access on a fair basis to tically integrated firm.
track outside their jurisdiction.
However, that does not mean that the incumbent
monopolists-who will alwavs argue that un-
Horizontal unbitidling bundling will increase costs-should go unchallenged.
There may well be options for allowing a
The second type of unbundling separates activities vertically urnintegrated firm (for example, a power
by markets-either geographically or by service generator) to compete with a firm whose operations
categories. In Japan, the national railway was reor- span the entire range of activities, although that
ganized and split into six regional passenger opera- would require a regulatory framework for ensuring
tors and one freight operator that rents track time interconnection. As long as competition occurs on a
from the regional railways. Gains from restructur- fair basis, the market outcome will indicate whether
ing have been enormous-freight volumes, which or not genuinely important economies of scope
had been falling before the restructuring, have risen, exisL
while unit costs, which lhad been rising, have de- But even where the technology permits unclined;
the need for government subsidies has con- bundling, the legacy of history and institutions
sequentlv fallen Other countries are now emulating often limits the possibilities. In Hungary a telecomthe
Japanese modeL Argentina split the monopoly munications law enacted in 1992 separated long dis-
Argentina Railways into five freight concessions tance (including international) services from local
and seven suburban concessions, with the efficiency telephone services, which are under the jurisdiction
gains reflected in a substantial reduction of the gov- of municipal authorities. Under the law, private
ermient operatig subsidy. The Polish national rail- concessions for local services were to be granted on
way is to be divided according to region served and a competitive basis. But practical problems intertype
of service (Box 3.1).
vened. As in other countries, local calling rates are
Teleconmnunications lends itself to this dind of very low, attracting few investors to that part of the
unbundling as welL The operation of rapidly grow- network And investors in the long distance service
ing radio-based cellular services is typically sepa- faced the prospect of bargaining with group after
rated from the provision of traditional telephone group of local government officials on terms of inservices.
In some cases, horizontal unbundling, or terconnection to local networks. A compromise
divestiture, into a number of producers allows di- awarded, a single franchise for long distance serrect
competition; in other cases, as when divestiture vices and 60 percent of the local network. Competileads
to regional monopolies, it allows for better tion for the rest of the local network was open to
performance comparisons and therefore more effi- companies with demonstrable financial strengtih
cient regulatory monitoring.
and sound business plans.
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