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Regulation and Investment: Case Study of Bangladesh

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World Dialogue on Regulation for Network Economies Regulation and Investment: Case study of Bangladesh Harsha de Silva and Abu Saeed Khan August 2004 Abstract The paper considers the available evidence in determining a relationship, if any, in the Telecom Regulatory Environment [TRE] of Bangladesh and investments in to its telecommunications industry over the last decade. TRE is segmented in to market entry, access to scarce resources, interconnection, tariff regulation and regulation of anti-competitive practices while investments are all non-divestiture foreign and domestic private and public investment. The TRE in Bangladesh is found to be wanting in all defined aspects. Interconnection is the worst of the five components, where a mobile only parallel network is being created due to regulatory ineffectiveness where almost ninety percent of mobile users do not have access to a fixed phone. Investments in to the fixed sector in Bangladesh dominated by the state owned virtual monopoly have been sorely inadequate and continue to be dictated by the funds availability [or lack thereof] of the Government. The mobile sector on the other hand has seen some amount of investments flowing in led by the widely acclaimed GrameenPhone. However, once standardized to compare across the region, it is found, even though using imperfect data to compare, that the reason for this flow could be the rub off of the attractiveness of the region and not necessarily the internal appeal of Bangladesh. In fact, there is circumstantial evidence to suggest that if the TRE in Bangladesh was better than what it is now the country would be able to benefit much more from the regional investment flows in to the sector. Table of Contents 1.0 Introduction 03 1.1 Objective 1.2 Developing world scenario 1.3 Bangladesh 2.0 Risk and Investment 09 2.1 Types of risk 2.2 Sources of investment funds 3.0 Study Methodology and Data Limitations 15 4.0 TRE and Investment: 1989 to Mid 2004 16 4.1 Fixed Sector TRE 4.1.1 Market Entry 4.1.2 Scarce Resources 4.1.3 Interconnection 4.1.4 Tariff 4.1.5 Anti-competitive Practices 4.1.6 Summary 4.2 Fixed Sector Investments 4.3 Mobile Sector TRE 4.3.1 Market Entry 4.3.2 Scarce Resources 4.3.3 Interconnection 4.3.4 Tariff 4.3.5 Anti-competitive Practices 4.3.6 Summary 4.4 Mobile Sector Investments 5.0 Concluding Comments 29 1.0 INTRODUCTION 1.1 Objective The objective of this case study is to gain insights in the relationship between investments in telecommunications and the respective regulatory environment in Bangladesh. The period under investigation is from 1989 to mid 2004. This case study follows the format of World Dialogue on Regulation for Network Economies [WDR] Discussion Paper 0303 “Regulation and Investment: Sri Lanka Case Study”. 1.2 Developing World Scenario Telecommunication is fast becoming an important sector in the economies of the developing world. While telecommunications infrastructure expansion is catalysing economic growth in the industry per se, its impact on information technology and related services are becoming even more significant in terms of productivity growth across sectors. With the growing evidence of causality there is a strong argument for further investments in this sector to help developing countries leapfrog. However, their governments are now more than ever restrained in undertaking investments in economic infrastructure such as telecommunications having to concentrate more on social infrastructure like health and education. Given this background and the resulting opening up of opportunities for private participation, it is important to understand the reasons behind private investment patterns in these countries. Figure 1: Trends in Telecom Investments [USD billion] Source: Private Participation in Infrastructure Database, The World Bank The above figure depicts the total private investments in telecommunications infrastructure, including purchases of previously government owned assets in the developing world in comparison to that of the South Asian region. A salient feature is that while total investments are declining after peaking in 1998, investments in the South Asia region are increasing. A detailed analysis of these investments however, indicates that the bulk of the funds were applied to India. 1.3 Bangladesh 1.3.1 Background Bangladesh came into existence in 1971 when Bengali East Pakistan seceded from its union with West Pakistan. Situated on the northern coast of the Bay of Bengal, Bangladesh is surrounded by India, with a small border with Myanmar in the southeast. The country is low-lying land of 144,000 sq. km. traversed by the many branches and tributaries of the Ganges and Brahmaputra rivers. Despite sustained domestic and international efforts to improve economic and demographic prospects, Bangladesh remains a poor, overpopulated, and ill-governed nation. Its current population is 140 million with per capita income of USD 380. All of the above is reflected in Bangladesh being ranked 139 [of 175] in the Human Development Index of 2003. Economic reform is stalled in many instances by political infighting and corruption at many levels of government. Progress also has been slowed due to opposition from the bureaucracy, public sector unions, and other vested interest groups. The present government has the parliamentary strength to push through needed reforms, but the party's political will to do so have been lacking in key areas. However, there is one very encouraging note about Bangladesh, and that is, its steady growth rate of 5 percent for the past several years. 1.3.2 The Telecommunications Sector In 1971, Bangladesh Telegraph and Telephone Department was set up under the Ministry of Posts and Telecommunications to run telecommunication services in Bangladesh. This was converted into a corporate body named Bangladesh Telegraph and Telephone Board [BTTB] in 1975. However, by Ordinance No XII of 1979, BTTB was re-converted into a Government Board to function under the Ministry of Posts and Telecommunications [MoPT]. BTTB's management board consists of a Chairman, four full time members and three part time members, all of whom are appointed by the Government. The MoPT reviews BTTB's annual development plans while the Ministry of Finance [MoF] approves the financing plan and allocates funds. BTTB has a de facto monopoly on domestic fixed-line public telephony and a de jure monopoly over international telephony. The sector was first opened up in 1989 with nationwide operating licenses being issued to Hutchison Bangladesh Telecom Limited [HBTL] for mobile and fixed wireless applications for all-Bangladesh for 20 years. This was followed by another licence to Bangladesh Rural Telecom Authority [BRTA] in the same year for rural telephony for 25 years. Pacific Bangladesh Telecom [PBTL] acquired HBTL in 1991. Since then four licensed private sector mobile operators and a number of value added service providers, including Internet Service Providers [ISP] have entered the Bangladesh market. The sector was regulated [licensing and spectrum management] by BTTB until the responsibility was transferred to MoPT in 1995. Later, under the National Telecommunication Policy of 1998 and the subsequent Bangladesh Telecommunications Act of 2001, the Bangladesh Telecommunications Regulatory Commission [BTRC] was established to be effective as at 31 January 2002. Figure 2 below depicts the framework of the telecommunications sector along with the curr

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