An address made by former Chairman, Maltacom plc and MISCO Managing Director Joseph FX Zahra, during a Malta Commonwealth Third Country Training Programme titled "Legal Frameworks for ICTs" on the 15th - 20th June 2009.

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Introduction

The world and work environment are constantly changing. Perhaps this notion recently had found itself again as a top agenda item in every boardroom, following last year's global financial turmoil and the subsequent spill over effects in other sectors, the world never experienced before. Business managers of every organisational set-up, dimension and nature, experienced dramatic changes in their environment in which they operate. The day-to-day internal functions required a business reengineering process to factor in the ongoing developments dictated by external forces. Nevertheless, it cannot be claimed that the recent cry for a general overhaul in the way organisations do business is a modern phenomenon. Modern economies have a track record in flexibility and in managing initial resistance to change. The era of Information and Communication Technology is a proof and a vivid example to such fact.

The prime objective of European governments' ICT applications is to improve the quality of life of its citizens and to foster a cutting edge infrastructure to enhance business activity, with minimum intermediation and at affordable cost. Since the early 90s, businesses and individuals had to be likewise responsive to this 'Information Age' in order to be relevant in todays economic realities. Modern technology and different modes of communication are not anymore considered something of luxury and status, but a mere basic need for everyone to grasp opportunities and address challenges in a 'Knowledge Society'.

Important milestones

Electronic communications providers usually find their grassroots stemming back from the nationalisation era, an economic process that was advocated to create the necessary basic infrastructure for normal operations to get started. Without the proper state intervention it would have not been possible for private investors to step in the sector at a later stage. The era of nationalisation experienced formations of several incumbents across the European continent namely Telecom Italia, British Telecom, Maltacom, just to mention a few.

The nineties experienced a common drive by public policymakers to inject efficiency and enhance cost effectiveness in state owned enterprises. Privatisation was considered to have all the necessary ingredients to strike a balance between giving value for money to the services rendered to their clients, grants innovative services, guarantees choice and last but not least minimise the costs of their provision. The need to rope in the private sector was always supported by its profit motive, where operating losses incurred through inefficiencies before then were fully financed through taxation raised from productive activities. Privatisation proved to be the catalyst of every incumbent that led to a series of inevitable changes necessary for such monopolies to strive the challenges brought about by the liberalisation of the electronic communication networks and services.

The attainment of optimal competition in the local electronic communications sector was very much debated during Malt's run up for full membership in the European Union. In its drive to harmonise its economic structures, Malta had to comply with the European Community's Regulatory Framework for Electronic Communications Networks and Services, by requiring regulatory intervention by a National Regulatory Authority to introduce effective competition into the local market by 2004. The major concerns and source of resistance were initially several, but the most important were mainly the limited size of Malta's economy, downsizing of labour force and the need for an attractive return as a compensation for the substantial capital outlays incurred to set-up business in the sector.

A Model for Liberalising the Communications Industry

The case for every secto's liberalisation is underlined by the theoretical underpinnings behind Competition Law; which revolves around the notion that competitive action drives communication providers to acquire more efficient technologies, increase capital productivity and minimise their operating costs. Moreover, regulation and competition policy aims to establish the right of a consumer to connect to the communications network at a price that does not exclude significant consumer groups. The EUs Regulatory Framework sought to instil competition in markets dominated by incumbents by imposing ex ante measures attracting new entrants by providing access to the incumbents essential facilities and interconnection with the existing network. The EU Commission aims at creating harmonised regulation across the EU, reducing entry barriers and fostering prospects for effective competition by a combination of legal instruments.

The success in achieving the above rests on a combination of four key elements embedded within every liberalisation process; (1) Economic Forces; (2) Consumers and Social Forces; (3) Government Policy and (4) Regulation. The lack of synergy between the four aforementioned factors, reflecting the various and sometimes conflicting interests of the 4 players in such a regulated market, namely, Operators, Consumers, Governments and Regulatory Authority, is the right recipe to head towards a market failure.

The economic dimension represents the operators interests. Entrepreneurs and investors can only, and will only continue to deploy high amounts of capital expenditure, if the returns on their investments are attractive. Investors are driven by the profit motive and capital can only be raised to finance innovation if there is a clear message of fair return to their risk taking.

Competition is a mutual element that features in both operators' and consumers' interests, although positioned in the opposite side of their objectives spectrum. On one hand, consumers' welfare is maximised with a number of operators in the market to compete in terms of innovative products, quality and prices. On the other hand, if liberalisation eliminates profits from existing markets there is the risk that operators cut down on their investment and so reduce services to customers.

Government Policy plays a pivotal role in the liberalisation process. Innovative ideas in the communication sector that are affordable amongst all the strata of society stimulate a feel good factor and well-being to its citizens, putting the government of the day in the limelight and fosters an image synonymous with a modern and fresh government. Economic evaluation of the communication sector should be extended to factor in the associated multiplier effects generated within the economy. A cutting edge communications infrastructure is one of the most important diamond factors to attract foreign direct investment. Case in point is the success story this country managed to achieve in its strategy to reshape the structure of its economy, in particular by establishing itself as a hub for a sound financial sector and similarly exploiting opportunities in the remote gaming sector, pharmaceutical and aeronautical engineering. These emerging sectors generate high value added, employment opportunities and a higher export capacity to finance the importation of commodities in which the country lost competitiveness in today's economic reality of trade liberalisation.

Nevertheless, regulation is the most important key element of liberalisation, usually the main source of discussions and frictions. Regulators are vital players in the communications market since through their legislative power; these authorities have to factor in all the other player's objectives, including governments, in order for the market mechanism to function at optimum capacity. Regulators should strive hard and are set mainly to achieve mainly three objectives; (a) to promote competition to achieve economic efficiency in the interests of users and society, in terms of choice, price and quality, ensuring that there is no distortion or restriction of competition and encouraging efficient investment in infrastructure and innovation; (b) to promote the interests of EU citizens by guaranteeing a minimum level of protection and thirdly; (c) must ensure that there is no undue variation in their bid to improve the functioning of the internal market. The fact that the Commission's Regulatory Framework makes no explicit reference to the scale of the markets in achieving the above objectives forms the crux of the current discussion within the communications sector, boiling a list of challenges to the current legislative and structural frameworks. The latter urges the call for a liberalisation model that is flexible and takes on board small-state characteristics.

The Case for a Regulatory Model for Small Island States

As businesses have to be responsive to the ongoing economic developments, it is high time that following the liberalisation process, regulators responsible for small island states will identify their unique legislative and structural challenges in meeting their objectives. Although small-state regulators are given the responsibility and flexibility of defining markets, assessing the degree of effective competition in relevant markets and independently choosing the regulatory measures imposed on undertakings with significant market power, the European Commission seeks to achieve a European System of Independent Regulators, with the aim of harmonising, maximise innovation, investment and competition in the internal market. The latter often results in growing concerns that the Commission have sent small-state characteristics to the backburner, and although flexibility is enshrined in regulatory and structural frameworks, the perception remains significantly persistent that one-size-fits-all regulation is the rule of the game.

Coordination between small member states should thus be sought to effectively present small state characteristics, which nowadays are increasingly featuring in modern literature. Moreover, research findings are supporting the fact that smallness constitutes a significant factor leveraging the outcomes of competition and liberalisation of the communications sector.

In terms of characteristics of small state economies, research found that there seems to be a general consent among a number of observations. A small economys capacity to support many competitors is limited and depicts high concentration in many of its industries. The main driving factor of concentration is the size of minimum efficient scale of production. Furthermore, small economies are characterised by high entry barriers, created by the lack of economies to scale achieved as manifested by higher prices due to the limited size of the market. In view of the latter, small state economies are operating at sub-optimal level of operation, and competition possibilities are limited due to the ease of market dominance by firms. Structural remedies, such as the dissolution of monopolistic or oligopolistic structures by reducing concentration, may on one level help reduce the feasibility of market power, collusion and interdependent behaviour. On another level, a trade-off is usually involved between enhancing competition and exploiting potential cost efficiencies that flow from minimum efficient scale of production. Finally, research proved that concentration measures alone are not a good guide for competition policy for small economies. Rather, measures of levels of concentration should be balanced with productive efficiency considerations dictated by the market size. All these factors prove to be unique characteristics of small economies and should be given sufficient weight in the industrys call for a regulatory model tailor-made to gauge the needs of small island states.

The Way Forward is a question of trade-offs

These small-state characteristics present regulators with a dilemma. Firms in small economies seek to achieve productive efficiency. However, since the market is most efficient when the optimum number of firms operate at efficiency levels, in a small economy this causes market concentration and a rise in market power leading to greater allocative inefficiency. The challenge is therefore for regulators to weigh up the trade-offs between productive efficiency and competitiveness, between the intensity of competition and capital outlays by the industry and between measures, which promote infrastructure-based competition, and those, which promote service-based competition. It is therefore a must for the Commission to publish guidelines and opinions on the consequences of small size on the implementation of the Regulatory Framework to ensure that reviews heed to market size concerns. The way forward thus call for the need for a stable and regulatory environment, with the wellbeing of consumers as its main objective, factoring in the question of trade-offs pronounced by the realities of small economies. Small-state operators have already set-up the Telecom Operators of Small States (TOSS), to lobby for their common interests. Hence, all the required ingredients and the proper channels to convey this message are already in place. The next stage is to see regulators and operators of small Member States working in synergy together and act as a catalyst conducive to all the outcomes and objectives of similar training programmes we are here for today.

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