Mexico’s Meandering Telecommunications Sector

México: How to tap progress

Ernesto M. Flores-Roux, PhDCentro de Investigación y Docencia Económicas, A.C. – CIDE

Federal Reserve Bank of Dallas, Houston BranchHouston, Texas, November 2, 2012

2

According to the OECD, Mexico has experienced a welfare loss equivalent to 2.8% of GDP per year in the last 5 years, 1.8 p.p. of which are due to excessive pricing

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

2.6 2.4 3.4

2.7 2.4 2.7 2.2

1.5 1.6 0.9

1.6 1.3

1.6

1.6 1.3

1.5

1.2

0.9 0.6

0.1

4.2

3.7

5.0

4.3

3.7

4.2

3.4

2.4 2.2

1.0

2000-2004: 4.2

2005-2009: 2.8

Welfare loss attributed to a dysfunctional telecom sectorPercentage of GDP

… due to unrealized subscriptions… due to excessive pricing

Loss in consumer surplus…

Source: OECD. (2012) OECD Review of Telecommunications Policy and Regulation in Mexico.

3

The amount of overpricing is higher than all but two taxes and is equivalent to the gasoline subsidy

Income tax (ISR)

Value added tax (IVA)Pemex

CFE

Special purpose tax (IEPS)

LicensingFlat rate business tax (IETU)

ISSSTE

Import taxCash deposits tax

IMSS

Social contributions

162.0Telecom overpricing according to the OECD

166.0 Gasoline subsidy

Series1 689.0

555.7

386.5

271.6

169.4

69.9

67.8

60.6

37.0

22.8

19.3

11.5

Public sector incomeBillions of pesos (nominal) – 2011

Source: SHCP (2012); OECD (2012)

4

If fixed telephony prices were similar to the OECD average, other basic staples’ prices could increase significantly with no impact on the inflation index

Series1

119%107%

63% 56% 51% 47% 41%

Eggs Pork Fruits Poultry Milk Tortillas Beef

INPC Fixed telephony weight: 1.51934Overpricing according to the OECD: 94.9%

Decrease potential: 0.77955

INPC weight 0.62302 0.69147 1.17588 1.31802 1.44288 1.58664 1.79145

Potential price increases with no effects on the INPC if fixed telephony were priced at OECD levelsPercentage over current price

Source: INEGI (2010, 2012); OECD (2012)

5

If these prices were the consequence of a vibrant telecommunications sector, there would be a trade-off to be considered. But that is not the case. In the most comprehensive measure of the ICT sector, published by the WEF, Mexico has lost between 12 and 32 positions in the last 10 years

Source: World Economic Forum

Series1

4149 48

4144

51

58 5856

44 44

60

5558 58

67

78 7876

Networked Readiness Index – NRIRanking of Mexico

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Original sample of countries (2002)

Overall ranking with an increasing sample size

6

TurkeyMexico

ChileHungaryBelgium

Slovak RepublicGreece

SloveniaEstoniaAustria

GermanyCanada

IsraelItaly

PolandSpain

Czech RepublicFranceIreland

United KingdomNew ZealandNetherlands

PortugalLuxembourgSwitzerland

IcelandAustralia

United StatesJapan

FinlandNorway

DenmarkSweden

Korea

0 20 40 60 80 100 120 140 160

Penetration of basic services lags behind many countries

Source: OECD (2012)

- 10,000 20,000 30,000 40,000 50,000 60,000 70,000

20 000

40 000

60 000

80 000

100 000

120 000

Mexico

Broadband penetrationFixed + Mobile, 2011

Average advertised speedin Mbps

GDP per cápita (PPP)

7

In mobile telephony in Latin America, Mexico lags behind every country except Cuba and Bolivia…

Source: World Economic Forum (2011); OECD (2011)

CubaBolivia

MexicoCosta Rica

Dominican R.Nicaragua

PeruHondurasColombia

GuatemalaParaguay

VenezuelaEcuadorPanama

BrazilArgentina

UruguayEl Salvador

Chile

14.1 78.4

84.3 85.8

89.1 92.8 94.7

99.1 99.2 99.5

102.7 105.8

110.0 127.3

131.3 139.3

142.3 143.6 145.4

Mobile penetrationMid 2012

8

… and it is a market which is extremely concentrated

Source: WirelessIntelligence (2012); company reports

IV-2

003

II-20

04

IV-2

004

II-20

05

IV-2

005

II-20

06

IV-2

006

II-20

07

IV-2

007

II-20

08

IV-2

008

II-20

09

IV-2

009

II-20

10

IV-2

010

II-20

11

IV-2

01168%

70%

72%

74%

76%

78%

80%

-2.5% in 4 years

70.3%

Telcel’s market sharePercentage

9

41 64 26 19

Penetration is very uneven among income groups…

Source: INEGI / ENIGH (2010) & ENDUTIH (2010)

XIX

VIIIVIIVIV IVIIIII

I

85 70

59 52

42 34

27 22

16 9

XIX

VIIIVIIVIV IVIIIII

I

92 86

80 77

72 66

57 49

37 22

XIX

VIIIVIIVIV IVIIIII

I

78 56

42 30

20 13

10 5 3 2

XIX

VIIIVIIVIV IVIIIII

I

67 43

29 22

12 9

6 3 2 1

Penetration of ICTs in Mexican householdsPer income level (deciles), 2010

Fixed Mobile Computers Internet

10

… and the gap is growing between the rich and the poor: the internal digital divide is growing very rapidly

Source: INEGI / ENIGH (2010) & ENDUTIH (2010)

Growth of ICTs in Mexican householdsPer income level (deciles), 2010

XIX

VIIIVIIVIV IVIIIII

I

5-2

-8-7

-10.6-11.5

-8-7

-6-5

XIX

VIIIVIIVIV IVIIIII

I

7.89.4

10.29.8

11.88.6

5.55.2

0.9-0.5

XIX

VIIIVIIVIV IVIIIII

I

3.63.9

5.63.6

1.40.4

1-0.4

0.81.3

XIX

VIIIVIIVIV IVIIIII

I

18.311.6

8.59.2

3.41.11.7

0.60.3

-0.2

-4.5-7.5

Top 50%Bottom 50%

9.83.9

3.60.6

10.20.7

Fixed Mobile Computers Internet

x 0.6 x 2.5 x 5.8 x 14.6

11

Schools are not well equipped…

Source: CIDE (2010)

DFNuevo LeónTamaulipas

Baja California SurCoahuliaTabascoSinaloa

ChihuahuaDurango

ColimaNayarit

JaliscoBaja California

TlaxcalaSonoraPuebla

MorelosQuintana Roo

CampecheOaxaca

YucatánMéxico

GuanajuatoQuerétaro

HidalgoSan Luis PotosíAguascalientes

MichoacánChiapas

VeracruzZacatecasGuerrero

7965

6160

5652

4946

4541

3836

35333333

322829

27262626

2525

1914

1312

98

5

Penetration of Internet access in schoolsPercentage, late 2010

Finland: 100%South Korea: 100%USA: >95%Chile: 75%

12

… and penetration in businesses is almost a mystery: no reliable statistics exist

Source: OECD (2011); For Mexico, from 20 to 49 employees

Series1

South Korea

Spain

Canada (2007)

Israel (2008)

Mexico (2008)

EU 27

Italy

Greece

10-49 employees50-249 employeesMore than 249 employees

Mexico (more than 10 employees):

51.6

Penetration of Internet in businessesPercentage, different years (as available)

13

The use of ICTs in government is also mediocre. In relative terms, it has gotten significantly worse in the last three years

Source: United Nations. e-Government Survey Report, 2008 & 2011

Series1 33

16

10

7

6

2

-9

-12

-15

-16 Mexico

Argentina

Brazil

China

Chile

Germany

United Kingdom

Colombia

Panama

Russia

51

52

55

72

36

16

3

40

62

25

Places gained (lost) in worldwide e-government rankings

2011 ranking

14

So what has gone wrong?

▪ Lack of government interest

▪ Not a national priority

▪ Inadequate laws and regulations

▪ Inadequate competition policy

▪ Abuse of injunctions

▪ Dominance of one player

▪ Regulatory capture

▪ No enforcement of laws and regulations

This can all be translated into one big issue:

Lack of institutions

15

So what can be done? First and foremost, institutions need to be fixed

Eliminate the “double window”

▪ Overlapping of functions does not provide checks and balances and creates enormous stress in the system

▪ The “double window” gives all players significant arbitrage opportunities

▪ It also reduces accountability in public officers▪ If not done correctly, the proposed creation of the

Secretaría de Comunicaciones will worsen the problem. This will determine, from the beginning, the possibility of changing the status quo

▪ Policy making and regulation need to be “MECEly” divided (Mutually Exclusive, Completely Exhaustive)

▪ Regulator must be able to fine players and set prices (either retail or wholesale) and the policymaker (SCT) ought to have no saying in the matter

16

Do “surgical work” to the different laws that rule the sector

▪ Fix the institutions – eliminate the “double window”

▪ Allow foreign direct investment with no restrictions

▪ Eliminate all bottlenecks and red tape contained in the law (enormous discretionary power to SCT and Cofetel)

▪ Allow Cofetel to determine “dominance”: currently, only Cofeco can do that, creating a “tercera ventanilla”

17

Change basic regulations

▪ Interconnection (prices should be set by the regulator, not negotiated between/among the players)

▪ Transport▪ Unbundling▪ Resale▪ MVNO▪ If all else fails, create alternative networks (“a la Telebras”)

▪ Develop (and enforce) asymmetric regulation for dominant players

▪ No discrimination /price differentiation▪ Interconnection rates

▪ Eliminate all bottlenecks and red tape created by regulation

Fix wholesale markets

Develop dominant player regulation

Eliminate red tape

18

Comply, enforce, and empower

▪ Guarantee that concession contracts are fully complied with:

▪ For example, Telmex continuously violates its concession contract, with no consequences whatsoever:

▪ Bundling of services ▪ Actions that can be considered dumping▪ Not allowing interconnection▪ Rural investment▪ …

▪ This is NOT restricted to Telmex, by any means: other players constantly abuse the system

▪ Information – availability + publicity▪ Citizen channels (“customer service”)

Enforce what is already available

Empower users

Mexico’s Meandering Telecommunications Sector

México: How to tap progress

Ernesto M. Flores-Roux, PhDCentro de Investigación y Docencia Económicas, A.C. – CIDE

Federal Reserve Bank of Dallas, Houston BranchHouston, Texas, November 2, 2012

ernesto.flores@cide.edurnst.flrs@gmail.com