DECEMBER 2014

DR PETER LOVELOCK

Manila, Philippines

Good Policy and Regulatory Practices for

Facilitating Trade and Investment in

Telecommunications and ICT Services

2

Telecoms Definitions are policy instruments

GATS • Defines as “transmission and reception of signals by electromagnetic means” and divides into 14 categories

WTO/OECD Basic vs. Value Added

• The difference defined in terms of real-time vs. not real-time = a shift away from the old distinction between VAS as an augmentation to a basic service

• Distinctions have little validity other than for regulatory purposes – if you want to regulate entry, call it ‘basic”

• Can be used in trade negotiations to impose limits on foreign entry and on competition in the domestic market

Baseline Study Definitions: Telecom

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ICT

No uniform definition

WTO ICT services seen as hybrids (‘convergence’) of existing services (e.g. cloud computing as convergence of data processing, telecom and other services)

OECD Telecoms; computer programming; consultancy and related activities; data processing; hosting and related activities; web portals; repair of computers and communications equipment; [would include social media networking, search engines, software development services, data services via internet, etc.]

How to define?

Depends upon the purpose – for trade, it depends upon: (a) aims of negotiations, (b) backward linkages of interest – job creation, barriers to entry,

competition levels, pace of innovation, etc.

Baseline Study Definitions: ICT

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Liberalization Regulation Investment – number one reason • Competitive new entry implies

investment

Free rider problem – new entrants should have +/- incentives to invest in networks

Sales innovation – economic benefits • New entrants make a market

Consumer protection against unfair practices

Price reductions – user benefits • New entrants come in with a lower

cost base (NGN)

Cross-subsidies need to be phased out and may be replaced for universal service obligations

Technology innovation • New entrants avoid legacy problems

so can easily adopt new technologies

Regulations need to be flexible to accommodate convergent services/new technologies

Foreign entry • Brings in expertise (Mode 4) • Only 8 APEC members fully open to

FDI

WTO requires ‘national treatment’; tax authorities look at revenues, curtail transfer pricing; FDI caps (usually on incumbent) in 11 cases; 3 cases prohibit FDI

Why liberalize? Why Regulate?

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The Benefits of Liberalization: Faster Growth

Source: The Centre for Internet & Society, Market Structure in the Telecom Industry http://cis-india.org/telecom/resources/market-structure-in-telecom-industry

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Foreign Direct Ownership Legal Form Required

100% Australia (35% Telstra), Chile, HK China, Japan (33% NTT), New Zealand (<50% Telecom NZ), Peru, Singapore, USA

None Australia, Canada, Chile, Hong Kong China, Japan, Korea, Mexico, New Zealand, Peru, Philippines, Singapore, Chinese Taipei, USA

Restrictions 60% Chinese Taipei (49% Chunghwa Telecom) Restrictions 49% or less Canada (46%), China, Indonesia (30%; 40% ASEAN member), Korea (33% Korea Telecom), Malaysia, Philippines (40%), Thailand

Joint Venture only China, Indonesia, Thailand Other Malaysia – only through acquisition of shares from existing owners

None Allowed Brunei Darussalam, PNG, Russia, Vietnam

None allowed Brunei Darussalam, PNG, Russia, Vietnam

Source: http://publications.apec.org/publication-detail.php?pub_id=1113#indi

APEC – FDI in Fixed-Line Telecoms

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Telecoms Investment Maps GDP Closely

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Source: ITU Measuring the Information Society 2013

http://www.itu.int/en/ITU-D/Statistics/Documents/publications/mis2013/MIS2013_without_Annex_4.pdf

… Including in Recovery

Annual investment (Capex) of telecom operators, world and by level of development, 2007-11

9

Source: World Bank Information Communications Technology for Development,

http://live.worldbank.org/information-communications-technology-development

Growth Effects of Telecoms, 1980-2006

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Roller & Waverman found that the impact of investment grew with the scale of the existing infrastructure = economies of scale and of scope grow with investment

Teledensity and the impact of telecommunications investment – developed economies These findings supported by other research

Source: http://publications.apec.org/publication-detail.php?pub_id=1113#indi

Econometric Analysis of Investment in Telecoms

Teledensity Impact of 10% investment

Torero et al. (2002) 5-15% 0.3% increase in GDP

Waverman et al. (2005) 10% 5.9% increase in GDP

Sridhar & Sridhar (2004) <20% 7% increase in GDP

Teledensity Impact of 10% investment

OECD average 30% 2.8% increase in GDP

USA 40% 7.8% increase in GDP

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The Internet

• Accounted for 3.4% of GDP on average in 13 countries

• Contributed to 21% GDP growth 2005-2010 in mature economies

• 2.6 jobs created for every 1 job lost

• 75% impact arises from traditional industries

• 10% productivity increases for SMEs from Internet usage

• SMEs using the Web growth faster and export twice as much as others

• Consumer surplus (value to all intra-marginal customers > cost to all customers) up to €20 (c.$24) per month

Source: McKinsey Global Institute (2011)

Internet’s Contribution to Economic Growth

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Scale and Employment

• 2012 – information industries directly accounted for:

– c.6% total value added – c.12% total fixed investment – c 4% total employment • Peak employment (~4.1%) in

2001 also saw the downsizing of employment in telecoms and ICT sectors

• Digital economy embraces non-ICT sectors

– ICT sector < 50% of ICT- related occupations in OECD

• 2003-2013: Employment in ICT-occupations grew

> 25% Australia/Canada ~ 15% USA 16-30% in other OECD countries

Source: http://www.oecd.org/sti/ieconomy/9789264221796-sum-en.pdf

ICT Sector in OECD: Employment Growth

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ICT Sector in OECD: Trade, Innovation

Trade Innovation

• 2000-2012: Computers and peripherals ↓ 38% to under 30% of world total ICT exports

• Communications equipment and consumer electronics ↑35% to c.35%

• China’s share of global ICT exports grew from 4.4% to c.30% o But only 17% in value added

owing to imports of intermediate goods and services

• ICT (incl. publish, digital media & content) – around 25% of OECD business R&D

• ICT patents accounted for 33% in main patent offices in 2014

• Between: 2002-14: o data-mining patents grew 3-fold o M2M patents grew 6-fold o ICT sector employs on average

30% of business sector researchers (only 3% have a degree in computer sciences)

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Services in 2012 % share world services exports, 2000 & 2012

• 66% of global output • 20% world exports (value)

o 30% from developing countries;

o 70% from developed countries

• 71% global employment • Telecom revenue: US$1.8Tr

o 40% from mobile o Developing countries’

share: from 26% to 30% (2007-2011)

• Shares of global services exports: o Transport = 20%; o Financial = 9%; o Comms = 2.6%

Note: falling share of developing countries in communications

Trade in communications: developing countries

23.1 24.2

30

15.8

27.4

17.9

12.7

25.2

7.3 9.6

-5.4

2

12.6 23.2

17.1 4.7

-10

0

10

20

30

40

50

Developing Countries

2000 Change 2000-12

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• More liberalization globally of ‘telecoms’ (108 countries) and ‘computers’ under GATS than under RTAs

• RTAs had more overall impact on the liberalization of transport services

GATS impact on ICTs: Greater than RTAs

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Modes Status Constraints

1. International Trade Strong. Telecoms & Internet traffic, data transfers, cloud access, payment systems, etc. all an integral part of world trade

Lack of IXPs in some countries and restricted access to IGWs results in tromboning traffic; growing costs of compliance (NTBT) e.g. personal data restrictions

2. Consumption Abroad Strong. Roaming, OTT services, virtualization of cloud services, etc.

Roaming charges can be prohibitive; lack of access infrastructure in some countries

3. Foreign Commercial Presence

WTO and GATS+ (e.g. ASEAN – Aus/NZ FTA; Korea-EU FTA; Korea-US FTA) has lowered or removed many FDI caps; RTAs and BTAs likewise

FDI caps remain in many countries; Basic vs. VAS used to market restrict entry; partial-SOTE remain; “localization” requirements becoming more widespread

4. Movement of Natural Persons

Large variations from 100% to highly restricted; very important for ICT sector

MRAs made slow progress; often restrictions on senior positions;

Modes of Trade in Services

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Restrictions on Trade and Investment in ICTs

Tariffs across APEC have fallen from 16.9% in 1989 to 5.7% (2012)

Non-Tariff Barriers to Trade (NTB) are the issue

1. Quotas and restrictive state-trading policies

2. Export subsidies and taxes

7. Antidumping regulations 8. Restrictive business practices

3. Discriminatory government and private procurement policies 4. Selective indirect taxes

9. Restrictive administrative and technical regulations 10. Controls over foreign investment

5. Selective domestic subsidies 6. Restrictive customs procedures

11. Restrictive immigration policies 12. Selective monetary controls and discriminatory exchange-rate policies

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Definitions for Trade – Too narrow, too broad? Type and scope Comment

Multilateral MFN clause gives greatest leverage;

RTAs (Plurilaterals) “Increasingly aim at deep integration with strong regulatory focus” (UNCTAD); include Mega-RTA efforts such as TPP, North-South and South-South

BTAs Many involve telecoms because it is a relatively straightforward sector, and many involve Asian countries, e.g. Korea

Multi-sector Doha Round shows how difficult to achieve; encourages trade-offs (pork-barrel tactics for corporate interests?)

Single-sector Rarely used but could be effective, focused and fast, without the “pork”?

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Mega-RTA is the TPP Trade in Services Agreement (TISA)

• Traditionally opaque, despite “briefings”?

• “Leaked” IPR chapter generated opposition to the scope and longevity surrounding IPRs, especially in the ICT space

o Do IPRs really reward innovators or corporate interests with deep pockets who buy the IPRs?

• Too many workarounds required?

o Too much “pork”?

• Started 2012

• Future proofing?

o USTR tells Congress TISA will cover services "that have yet to be conceived" and the inclusion within a services deal of rules making regulatory processes in participating countries more transparent.

• USA + EU + 23 countries involved

Plurilaterals

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• RTAs induce more GATS+ commitments in developing than developed countries because (i) lower level of WTO commitments; (ii) asymmetric bargaining power

• US-RTAs induce more commitments from developing countries

Liberalization under RTAs

What technologies are being used? What trends loom over the horizon? What is the next stage of management? Where are the opportunities and risks?

Convergence Trends

Trends…

Hetnets

Advanced Robotics

Internet of Things/ Internet of Everything

Tracking and Surveillance

Wearables and Edibles

Machine-2-Machine (M2M)

Cloud Orchestration

Big Data/Data Analytics

TV White Spaces

Dynamic Spectrum Allocation

Smart cities

CyberSecurity and Legal Intercept

MOOCs

… and Buzzwords

Industry 4.0

3-D Printing

Digital Advertising and Real Time Bidding

Immersive Media

Cognitive Analytics (Artificial Intelligence)

Multistakeholderism (vs Multilateralism)

Virtual Identity/ Managed Identity

Bitcoin and digital or cryptocurrencies

Tokenisation

Crowdsourcing

Sharing Economy

Trends

• Mobile Ramping Faster and Will Be Bigger Than Most Think

– Five key trends converge: 3G/4G, social, video, OTT, and mobile

• Game-Changing Communications / Commerce Platforms

– Improvements in social networking and mobile computing platforms fundamentally changing how people communicate

• Massive Data Growth Driving Carrier / Equipment Transitions

– Increasing 3G / smartphone penetration and emerging usage models (video/ audio streaming) have stressed and broken carrier wireless models

• Regulators Can Help Advance Evolution…Or Slow It

– Inherent conflicts between the wants / needs of consumers and those of incumbent providers are creating challenges

Convergence

• Convergence of key regulatory issues across multiple emerging areas: e.g. privacy in social media vs. privacy for cloud computing.

• Clash of regulatory bodies and overlapping of regulatory domains due to convergent technologies and new developments

– m-payments: bank regulator/central bank vs. infocomm/telco regulator

Challenges:

• Getting around regulatory silos - Who will regulate and how?

• Compliance issues with multiple regulators in converging industries.

• Adequacy/ applicability of existing laws (eg., electronic transactions, competition, fair trade laws) for current ICT landscape.

Regulators & Operators

Operators

Compliance – which laws & regulations apply for NGBN?

Which regulators apply?

o Broadcast?

o Data protection?

o Competition Authority?

o Fair Trade Authority?

Can apps and services be fully monetized without violating Net Neutrality?

What becomes of the USO?

Regulators

Adequacy/relevance of existing sector-specific laws and regulations – e.g.

Competition laws

Data protection laws

The balance between current consumer protection and possible market outcomes (e.g. Net Neutrality)

Unified/simplified licensing

Other?

o Enhancing the digital economy?

Net Neutrality

• Net neutrality is slowly being picked up by regulators and industry players in Asia Pacific

• Driven by govt. initiatives such as NBN projects, convergence, smartphone boom, bandwidth intensive apps, and declining traditional revenue for telcos and the threats from OTT services

• Discrimination against vendors (blocking, throttling, degrading, etc.)

• Discrimination against users

Challenges:

• Transparency of practices, such as network management

• Promoting BB use vs. promoting innovative services

Opportunities:

• How to drive BB? Eg, revenue share arrangements, etc.

• How to drive innovation? Gov-sponsored ecosystems, frameworks

• How to drive consumer engagement?

• How to drive profitability… new biz models?

Data Flows Privacy laws and localization

• Two broad issues: application of local data privacy laws and the forced localization of databases

• Two approaches to data privacy laws: geographical (EU) versus accountability (APEC)

• Countries also have sector-specific safeguards:

Australia: health records

New Zealand: all tax-related business info must be stored on a server locally

S.Korea: some personal banking and financial information can be outsourced overseas, but must retain local office

China: data from VAS must be stored locally with JV partner; all locational services must have servers in China

Taiwan: threatening to restrict the processing of financial transactions offshore

India and Malaysia: residential data must be stored on local servers

Vietnam: all SNS and general website operators should have in-country server – but not clear how far applies to international Internet companies

Data Protection & Cyber-security

• Driven by popular considerations (consumer protection), commercial issues (attracting FDI), national competitiveness assessments (tilting the playing field), national security (everything from terrorism and trafficking to national commercial considerations) and global security (again, covers the ground from DDoS attacks to cyber warfare).

• What are the applicable frameworks for compliance and enforcement?

• Who should set the rules or the standards?

• What – and who’s – standards to adopt?

• What is the impact of enforcement and risk of govt intervention on legitimate business operations?

Data transfers are the lifeblood of the international digital economy

Source: McKinsey, April 2014, Global Flows in a Digital Age http://www.mckinsey.com/insights/globalization/global_flows_in_a_digital_age

Witness growth patterns in cross-border trade in goods, services, e-commerce, financial flows etc

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Looking Forward: Contentious Trade-Related Issues

Concerns Considerations

Policy/regulatory spaces become narrower; industrial policy constrained; regulators dealing with powerful foreign players: Note International Trade Union Confederation (ITUC) against ITA-ll (products not services) which has “eroded policy space for the majority of developing country participants”

Policies and regulations can become more focused on protecting consumers not investors, and smarter and more flexible, e.g. spectrum sharing;

Local competitors may be too weak to survive without partnering; may cause lay-offs

New technologies and expertise; inward investment; more consumer choice; create new job opportunities

Loss of national control over SOTE and revenue direct to the Treasury

Tax revenues grow with the sector

Legal sovereignty at risk from Investor State Dispute Settlement (ISDS) agreements

Greater foreign Investor confidence

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Looking Forward: Contentious Trade-Related Issues Concerns Considerations

As TBT come down, NTBT proliferate in terms of standards issues, IPRs, data protection laws, cross—border payments, localization requirements, etc.

These issues may improve confidence of local consumers and/or local investors; may motivate more JVs, but can also undermine FDI confidence

Universal service and net neutrality issues Major differences of opinion and of sector interests which have not yet become hot potatoes in Asia

Scarce resources, such as spectrum, seen as national sovereignty issues

Raid changes in technologies and markets put a premium upon learning the best practices from other jurisdictions

International and regional cooperation, alignment, harmonization on a range of issues pose local challenges

These are mostly NTBT and would greatly reduce the costs of doing business + improve investor confidence

Thank You

DECEMBER 2014

DR PETER LOVELOCK

Manila, Philippines