Liberalization and Regulation in the Telecommunication Sector. Economic Background

For about 15 years the telecommunication sector, erstwhile an inert sector dominated by national monopolies, has been undergoing a dramatic transformation towards a competitive market for information services. The potential for explosive growth – long-term scenarios expect as much as a fourfold increase in real terms up to 2010 – has moved this sector into the center of economic policy making. Deregulation efforts attempt to eliminate the negative effects associated with a monopoly, by stimulating competition and regulating the dominant seller in the market, so that the dominant firm can no longer exploit the market power that remains even after liberalization. In practically all "deregulated" countries this strategy was implemented with the goal of stimulating competition and of securing a measure of fair competition through regulatory measures. There are various approaches to fostering competition: in the U.S., the dominant supplier (AT&T) was split up into regional companies, providing local telephone service, and a company operating in the long-distance segment. In the U.K., the dominant supplier was subjected to competition and then privatized. Aside from the market structures, several features are of central importance for supporting a well-functioning competitive market: access to the net of the dominant supplier, interconnection fees, numbering, and the universal service. Regulation of the dominant supplier is of decisive importance for the success of a liberalization drive. A basic distinction can be made between a "rate of return" regulation and the setting of maximum prices. In recent years, the regulation systems have tended towards instituting price caps because they offer the regulated enterprise a much greater incentive to introduce innovations, to increase efficiency, and to cut costs. The impetus for a reform of the Austrian telecommunication system came from outside of Austria. The need to adjust follows from the GATT treaty – which contains a chapter on services: General Agreement on Trade in Services (GATS) and Related Instruments – and the reception into Austrian law of EU laws through the EEA and Austria's accession to the EU. Austria's activities in this regard were limited by the desire to institute only the absolutely necessary adaptations at the latest date possible. The central problems are the draft of the bill regulating the structure of the postal service and a regulatory framework for the dominant supplier. Both items will be of decisive influence on the development of the telecommunication sector in the medium term: the decisions now taken will determine whether Austria will or will not have competition in this sector. Given the huge reform deficit, Austria's Postal Service will have to undertake massive adjustments to cope with the new challenges. Austria's attractiveness as a location of economic activity will depend to a large extent on the success of this reform.