ASi" kUCTURE FlOR DEVELOPMENT

Helped in part by sectoral unbundliing, competi- domnestic long distance services (Chiile and Mexico
tion iifrstricture sectors ha-s increased in the by 1996 and Honig Kong by 1997).
past decade. The possibilities and conditions for ei- Although transitional issues arise when competifective
competition are illustrated below for urbani tion is being introduced, pragmaticsolutions canbe
transport, teleicommunications, and power.
found. In the past, long distance telephone calls
were priced high enioughi to allow mionopoly suppli-
URAN4 BUS TRANspocr. C'ompetitioni has stimu- ers of telecommunications services- to earn reasonkited
bothi innovation and cost reduction in urban able profits whiile keeping down the price of access
public tranisport. In Sri Lanka, for example. deregu- to the network and of local calls. With unbundling
lation permitted the profitable operation of smaller and increased competition, this structure of prices
vehiicles-by small-scale entrepreneurs, substantially becomes uinviable, and rate rebalaning is required.
improvinig service availabilily. Competitively ten- But during thle transition the incumbent operator is
dered franchises or the granting.of overlappinig saddled with the old rate structure and service.
franchises to competing.associations of operators is obligations. If new entrants are unencumbered by
being practiced successfully in several nmajor cities these obligations, they will flock to sectors with artiin
Latin- America anid Africa.
ficially bigh pro'fitbLiy a "cram skimming" that
Th-e challenge is to combine competition, for its canr be econromically inefficienL
cost-reducing impulse, withi residual controls to en- Mexico and the Philippines have taken two difsure
the quality of service and maintain operating ferenit approaches to resolving suchi conflicts. In
discipline. Fragmentation of ownershiip has in some Mexico, Telqifonos de M&xico (Thimex) was awarded
instances led to difficulties with route coordination a six-year monopoly under a concession agreement
and, at times, to excessive congestion and unisafe in 1990. To begin to bring prices in line withi costs,
practices. In some countries, at least part of the orga- rates for local services were waised three or four
nizing or regulatory function has been taker ovrrby. times over original levels. Telmex was required to
an operators' association. Experience with suchi as- furth-er rebalance rates during the period of the consociations
.8 shows thiat, while some aspects of regula- cession; long distance rates have fallen, while rates
M
tion can be successfully delegated to the private se- for local services hiave risen steadily. Thle Philiptor,
provisions are needed to ensure that regulatory pines chose instead to encourage-new entry immepowers
are not used to prevent new entry. More- diately. New operators are prevented from serving
over, public scrutiny and r-egulation on such matters
as passenger safety, service obligations - and polluonly
th-e lucra tive international services market and
arereuedtpmde30lclxhaglisfo
tion are essential in this competitive industryeahlnontirnentoalgewy
The opposite problem arises when thie incumbent
TELECOMMIUNCAlloNs. A major competitive ele- operator acts to limit competition, placing the aspirmerit
of special relevance to developing countries is ing enitrant at a disadvantage. This is especially th-e
thie advent of radio-based cellular telephone nlet- case whien the entrant's use of thie inicumbent's
works. These networks hiave'relatively low.capital established network is restricted, reducing.tile encosts,
making their market rzadily contestable. tra nt's reach until it has invested in possibly dui-
Radio-based telephones compete withi existing loaml plicative network facilities. Such a bottleneck effect
networks-and in many coun tries, with one an- in facilities owned by thie incumbent is also an issue
other. By 1993 Sri Lanka had licensed four cellular- in other sectors when they are vertically unbunoperators,
leading to tariffs that are among the low- died-access to the railtrack is required by all serest
in the world: connection costs of $100 anid oper- vice operators, and competitive generators need the
ating costs of 16 cents a midnute. Comnpare those right to transm-it and distribute electricity over mocosts
with thle more typical costs in El Salvador- nopoly facilities. Two distinct issues need to be re-
$1 .0(X and 35 cents a minute~-which has a sinigle solved for efficient interconnection of entrants: the
operator. However, regulation is important to sus- physical right of access and, at least as important,
tain competition. For example, in Mexico regulatory the price of access. No established norms exist for
action was necessary to ensure fair interconnection interconnection pricing, although a variety of apby
cellular operators into fixed netwvorks.
proaches are being tried. Most favorable to Hie in-
Lo-ng distance services will be the next arena of cumbent i- -in arrangement whereby the price of incompetition
in developing countries. Korea already terconnection between a point on the network and a
allows competition in in ternational siervices. Other customer is the retail price charged by thec incumcountries
are conmmitted to permitting new entry in bent less direct costs of operating that link 7this