The telecommunications industry in Turkey has gone through a number of significant changes in the last few years. The monopoly of the incumbent operator over fixed line infrastructure and voice services has been terminated as of the end of 2003. An independent regulatory authority has been established in 2000 with extensive authority to issue secondary legislation. The incumbent operator is up for privatisation in 2005. Overall, the development of competition has been slower than expected. This paper examines the interaction between privatization, liberalization and competition law enforcement and analyzes their impact on the performance of the industry. It reviews the emerging regulatory framework, compares it to that prevailing in the EU and provides an account of the main competition law cases carried out by the Competition Authority. It identifies that main shortcomings of the regulatory framework and provides some recommendations to improve it.
This paper is prepared for the Competition Authority/TOBB/World Bank project on “Competition Policy and the Improvement of Investment Environment in Turkey: Sectoral/Institutional and Legal Framework”. I am grateful to Shyam Khemani, Baha Karabudak, Ihsan Kulali, Toker Doganoglu, Ferhat Topkaya, Ali Demiröz, Özge İçöz, Ekrem Kalkan and two referees for their helpful comments. Any errors are my own.
Introduction Competition is a new phenomenon in the Turkish telecommunications industry. Until recently the fixed line segment consisted of a state-owned vertically integrated statutory monopoly, Türk Telekomunikasyon A.S. (TTAS). In the mobile segment, since the mid-1990s there were two operators, Telsim and Turkcell, which had revenue agreements with Türk Telekom; these operators were not free to set their prices, the latter was controlled by Türk Telekom.
The industry has gone through a number of significant changes in the last few years. The mobile operators were granted concession contracts in 1998, which started a period of genuine duopoly competition. Additional licenses were granted in 2000. The monopoly of TTAS over fixed line infrastructure and voice services ended at the end of 2003 and it was announced that TTAS would be privatized in a few years. The Telecommunications Authority (TA) was established in 2000 with extensive powers to issue secondary legislation in areas such as tariffs, interconnection and (since 2001) licensing, to monitor compliance and impose fines in case of non-compliance.
The termination of monopoly rights of TTAS and the establishment of the TA were seen as changes that produced an opportunity to create an environment conducive to competition, introduction of new services, higher investment and growth. It was hoped that Turkey’s quest for European Union (EU) membership would facilitate the creation of such an environment.
In the telecommunications sector, whether or not the business environment is conducive to investments, either in the form of new entry or expansion of existing plant, depends critically on the existence of a regulatory framework that encourages new entry on the one hand and prevents anti-competitive behaviour by incumbents on the other. In order to be effective, such a regulatory framework has to be perceived as fair, transparent and predictable by the potential investors. In most countries, such a regulatory framework entails both ex-ante sector-specific regulations, and the ex-post enforcement of competition law. In many, but not all countries, these are implemented, respectively, by a sector-specific regulator and an agency that specializes in overall enforcement of competition law.
This paper examines the interface between competition, regulation and privatization and presents an overview of the evolution of the industry in recent years. The main conclusion of the paper is that the development of competition in the industry is slower than expected, even in the most potentially competitive segments.
The Regulatory Regime In the telecommunications sector, whether or not the business environment is conducive to investments, either in the form of new entry or expansion of existing plant, depends critically on the existence of a regulatory framework that encourages new entry on the one hand and prevents anti-competitive behaviour by incumbents on the other. In order to be effective, such a regulatory framework has to be perceived as fair, transparent and predictable by the potential investors.
The regulatory regime in Turkey is inspired by the European regulatory framework for telecommunications, however significant divergences exist. The most significant divergence lies in the licensing regime. While in the European regime entry is regulated through general authorizations, and, in cases where scarce resources such as frequency are involved, through rights of use, the Turkish system relies on a highly cumbersome regime where separate individual licenses are needed for narrowly defined activities. This makes entry difficult. Moreover this type of regime potentially suffers from uncertainty regarding the exact coverage of the licenses and creates incentives for frivolous legal challenges.
The interconnection regime is closer to the European practice. It stipulates voluntary commercial agreements for access and interconnection, with the TA intervening for dispute resolution in case the parties fail to reach an agreement. It also allows the TA to impose various obligations of access, transparency and cost orientation, especially on operators designated as having significant market power.
TA has published a Standard Interconnection Reference Tariff (SIRT) that will be enforced in case parties fail to reach an agreement. Charges for call termination on the incumbent’s fixed network are higher than those prevailing in Europe. By contrast, those for termination on mobile networks are lower than the European average. The interconnection charges announced by the TA seem to reflect a more pro-entry attitude in the mobile segment relative to the fixed segment.
Many countries see provision of unbundled access to local loop as an important step in the development of facilities based competition. In Turkey, unbundled access to the local loop will be available in the second half of 2005.
Turkey has a separate Law on the Protection of Competition which is enforced by the Competition Authority (CA). The CA has taken a number of significant decisions in the telecommunications industry involving cases of abuse of dominant position by incumbents in both the fixed and wireless segments. There is some ambiguity in the relevant laws regarding the division of authority between the TA and CA, and the two agencies have not been able to develop a productive relationship. The degree of complementarity between the two agencies is low, exchange of opinions are rare and not fruitful when they exist. The evolving tendency is that the CA will not investigate allegations of competition law violations when actions in question are in areas regulated by the TA.
Industry Performance and the Impact of the New Regime The recent overall investment performance of the industry has been poor. After a period of rapid expansion that lasted until mid-1990s, total investments in the telecommunications industry have slowed down. According to data from the International Telecommunications Union, between 1996-2002, telecommunications investment has remained at about 0.26 percent of GDP in Turkey, which is lower than all types of comparators, including Germany (0.45 percent), France (0.46 percent), Portugal (1.47 percent), Brazil (1.17 percent), Mexico (0.70 percent), Bulgaria (0.79 percent). In comparative terms, investment in the fixed segment has been poorer than the mobile segment. One of the main objectives of the new regime was to promote new investments by creating a competitive environment. The review presented in this paper suggests that that the first one and a half year of liberalisation has not yet created an environment that will generate a significant jump in investments.
Even after more than a year and a half of full liberalization, competition in fixed line telephony is very limited. Licenses for domestic long distance and international telephone services have been issued in May 2004. However, effective competition has been delayed by various actions of the incumbent operator, including denying or delaying the availability of carrier selection (CS) and pre-selection (CPS) services for the new entrants, despite rulings by the TA. The TA has so far not taken any remedial action against TTAS’s failure to provide CS and CPS services. Hence, as of June 2005, pure resale is the only possible mode of entry into the long distance business.
Competition for local access services is not yet permitted. The regulation for issuing licenses for alternative local access infrastructure such as cable, fiber optic or fixed wireless access (FWA) was put out only a full year after liberalization, and no licenses have been issued because the Ministry of Transport has not determined license fees since then.
Duopoly competition in mobile markets existed since the 1990s. Interestingly neither of the incumbents, Turkcell and Telsim, were associated with Türk Telekom, and soon Turkcell became the leader with a market share reaching 60-70 percent. The government issued two additional licenses in 2000, one to a joint venture that included Telecom Italia Mobile, representing the largest foreign direct investment to date, and one to TTAS which established a mobile subsidiary. New entry did little to challenge the dominance of Turkcell, partly because the intentions of the government and the regulator to impose roaming obligations on the incumbents were successfully frustrated by the incumbents through legal challenges. Eventually the two new entrants merged into one.
An important potential competitor to the fixed line incumbent operator is the cable TV (CATV) network. Pursuant to a Competition Authority decision, the CATV network has been separated from Türk Telekom prior to privatization and placed under the state owned satellite company. The opportunity that this potentially important step has created to encourage competition and new investment in alternative access infrastructure is being wasted by the government’s refusal to issue licenses.
Overall, then, while there is a trend towards more competition, it would be fair to say that both the current level and the rate of development of competition are below expectations.
Assessment: Competition, Regulation and the Deficiencies in the Investment Environment The sluggishness in the emergence of competition reflects inadequacies in the regulatory environment. While overall the regulatory environment in Turkey is changing in the right direction, the pace of change so far has been slow. This is partly explained by the fact that the sectoral regulatory authority is young, has had to go through significant amount of learning itself, and has been suffering from inadequate human capital. Regulations put out by the TA have had unintended gaps and legal vulnerabilities which became apparent only after they were put into effect. Such a process of learning from mistakes was probably unavoidable.
However, delays are also due conscious choices of the Ministry and the sectoral regulator, as exemplified in significant delays in issuing licenses. More generally, the Ministry does not seem to appreciate what it takes to develop competition in the telecommunications nor the magnitude of the welfare costs generated by delays in the creation of competition. In addition, the prospect of privatization of Türk Telekom seems to have prompted the authorities to slow down the introduction of competition in expectation of higher privatization revenues.
The main drawbacks in the Turkish regulatory environment are as follows:
So far, the regulatory framework has not been very successful in curtailing efforts by the incumbent operator to delay competition and new entry. In fact, some features of the regulatory framework, such as the licensing regime, have helped the incumbent with its delaying tactics by creating opportunities for legal challenges.
There is significant regulatory uncertainty. The Ministry does not seem to be committed to the development of competition in the industry, or at least, it does not seem to appreciate what it takes to create competition in this sector. The commitment of the sectoral regulator is hampered by the lack of commitment by the Ministry. In fact, it is quite likely that a stronger endorsement of competition by the Ministry would have reduced the resistance of TTAS to the emergence of competition. The prospect of privatization of Türk Telekom seems to have prompted the authorities to slow down the introduction of competition in expectation of higher privatization revenues. The Turkish experience has shown that even when the regulatory authority is delegated to an agency with significant formal independence, political ownership is still important for the creation of a suitable investment environment.
Regulatory decision making, while much more transparent than the rest of the bureaucracy, is not transparent enough. In the current regime, the decisions of the Telecommunications Board need not be made public; also regulations and board decisions do not need to be supported by justifications. This increases regulatory uncertainty as the intentions of the regulator remain unclear. From the investors’ perspective it increases regulatory discretion and reduces trust in the appeal mechanism.
The TA routinely announces annual work plans which help reduce regulatory uncertainty. The current work plan includes important actions such as implementing unbundled access to the local loop, number portability, and carrying out market analyses. However, there is still uncertainty about how effective the implementation of these regulations will be.
There is insufficient collaboration between the sectoral regulator and the competition authority. This prevents useful exchange of ideas.
The following are likely to generate significant improvements in the regulatory environment:
Clearer ownership of the competition agenda by the Ministry. It is hoped that the completion of the privatization of TTAS will encourage policy makers to embrace that agenda more wholeheartedly.
Preparation of a policy document by the ministry or the TA, outlining the government’s main objectives in the area telecommunications policy, outlining challenges regarding the development competition in the industry and presenting the government’s perspective (including justifications) on the main issues such as licensing, interconnection, facilities vs service based entry etc. This would help reduce regulatory uncertainty and enhance accountability
Increased accountability and transparency of the regulatory agencies: publication of all TA Board decisions concerning the telecommunications industry along with justifications
Simplification of the licensing regime; adoption of an EU-like approach that relies on general authorizations and rights of use
Effective implementation of the next steps in the regulatory agenda, including unbundled access to the local loop, licensing of alternative local access services, privatisation and liberalisation of the cable infrastructure.
Increased cooperation and complementarity between the sectoral regulator and the competition authority; clarification of their respective roles and institution of stronger channels of dialogue.