OECD report urges reform of Mexico’s telecom laws to increase competition

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Mexico should quickly reform the laws and regulations governing its telecommunications sector to boost competition, investment and drive growth across the economy, according to a new Organization for Economic Cooperation and Development report.

In its report, OECD said Mexico should make regulatory authority Cofetel more powerful and independent. This would include increasing its financial and administrative independence and its ability to impose higher sanctions than it can today to deter anti-competitive behaviour.

“The double window, whereby a regulatory process is conducted twice by two different authorities, should also be removed and the procedures leading to regulatory decisions simplified,” OECD noted.

The study “OECD Review of Telecommunication Policy and Regulation in Mexico (download here),” was commissioned by Mexico’s communications and transport (SCT) together with Cofetel. The report highlights the ineffective competition and impaired regulation that have resulted in the incumbent operator controlling 80% of the fixed and 70% of the mobile telephony market. The average market share of the mobile incumbent in OECD countries is roughly 40%.

Mexico’s communications and transport minister, Dionisio Pérez-Jácome, said during his speech (read the full document here) that in the past ten years the telecom sector jumped from 1.7% to 3.3% of Mexico’s total GDP.

“The fixed broadband penetration reached 11.4% in 2011, which is more than Brazil’s or Argentina’s rates, and it is not highlighted in OECD’s study. If adding mobile broadband, which at the end of 2011 reached a penetration of 7%, the result of growth in 3G penetration reaches 18.4%,” Pérez-Jácome explained.

However, OECD noted the lack of competition has led to higher prices for consumers and businesses and slowed the uptake of new services. The OECD report also noted Mexico is at the bottom of the rankings compared with other OECD countries in market penetration for fixed, mobile and broadband services. Profit margins for the incumbent are much higher than the OECD average, while investment per capita is lower than in any other country.

“The study gives us elements to continue working on the design of public policy and better regulation, based on international best practice, so we have a more competitive industry, convergent and dynamic,” added Pérez-Jácome.

The institution estimates the cost to the Mexican economy to be around $25 billion each year, equivalent to nearly 2% of GDP.

During the study presentation, Cofetel President Mony de Swaan said “The market concentration, low levels of penetration, excessive judicialization, resistance to change, the lack of real commitment … all of this affects the only victim, which is the consumer and the citizen who can not even access these services. According to the OECD, as long as we postpone our transformation, the Mexicans will lose $71 million per day. This is the cost for doing nothing. I think, indeed, it is an urgent call action.”

Regarding Cofetel’s roles, he admitted that the regulatory body still lacks internal regulations, essential to its daily operation. “Our country lacks an effective policy that gives spectral certainty and facilitate the adoption of new technologies under principles of universal, non-discriminatory and shared. Barriers to entry and the digital divide, hurt the country a whole,” de Swaan said.

The OECD report noted that reforming the court system (especially the “amparos”) that enables firms to appeal regulators’ decisions systematically would help. The current system encourages firms to file a virtually endless number of injunctions in order to delay or prevent new regulations from taking effect. Instead, OECD said regulators’ decisions should remain in force until the appeals process is finished, as is the norm in OECD countries. The appeal process should be streamlined and the government and regulator made responsible for policy making and regulation, not the judiciary.

Looking ahead, the OECD report says that Mexico should reform the current concession system to simplify and encourage market entry, as well as draw a clear line between policy and regulatory functions, where the latter shoud be moved to Cofetel. OECD also noted Cofetel should undertake market reviews, declare that a player has market power, and impose and effectively enforce the appropriate remedies, including asymmetric regulation. Cofetel also should be authorized to establish non-discriminatory conditions for access to bottleneck facilities including local loop un-bundling.

Other recommendations in the OECD report:

–The consolidation of local calling areas as determined by Cofetel should be mandated to ensure lower calling costs between affected areas.

–Foreign investment and ownership restriction in fixed-line networks should be lifted to encourage new market entry and investment.

–OECD also suggested to make available sufficient spectrum resources and backbone fiber to meet the growing demand for mobile broadband data services and backbone connectivity. But care should be also taken to avoid situations of dominance in these markets.

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