NOTE NUMBER 256 P U B L I C P O L I C Y F O R T H E 26398 privatesector MARCH 2003 Internet Access Mohammad A. Mustafa Mohammad A. Mustafa Regulatory Levers for a Knowledge Economy (mmustafa@worldbank. org) is a lead private I n t e r n at i o n a l ex p e r i e n c e s h ow s t h at t h e c r i t i c a l f a c t o r s i n b u i l d i n g sector development k n ow l e d g e - b a s e d e c o n o m i e s i n c l u d e b ro a d a c c e s s t o t h e I n t e r n e t specialist in the Middle East and North Africa t h ro u g h l ow - c o s t , h i g h - q u a l i t y c o n n e c t i o n s , h i g h c o m p u t e r l i t e r a c y T H E W O R L D B A N K G R O U P PRIVATE SECTOR AND INFRASTRUCTURE NETWORK Region of the World Bank. a n d c o m f o r t i n u s i n g t h e I n t e r n e t , a n d u s e f u l c o n t e n t a n d i n n ovat i ve I n t e r n e t a p p l i c at i o n s t o c re at e va l u e . T h i s N o t e f o c u s e s o n t h e f i r s t f a c t o r, p ro p o s i n g a reg u l at o r y s t r at eg y t o ex p a n d I n t e r n e t a c c e s s t h ro u g h l owe r c o s t s a n d h i g h e r - q u a l i t y s e r v i c e . A l t h o u g h m a ny d eve l o p i n g c o u n t r i e s h ave re f o r m e d t h e i r c o m m u n i c at i o n s s e c t o r, f ew h ave m a d e a c h i ev i n g t h i s k i n d o f I n t e r n e t a c c e s s a n ex p l i c i t g o a l . Internet access depends on four critical players: ing the telecommunications infrastructure, First, providers of telecommunications infra- enabling viable ISPs, ensuring efficient pricing, structure (bandwidth capacity) for international maintaining appropriate service quality, sup- access to the global Internet backbone. Second, porting diffusion in remote areas, and ensuring providers of national long-distance telecommu- legal certainty for electronic transactions. nications transmission capacity (such as leased lines) to connect Internet service providers Promoting the telecommunications (ISPs) with one another and with international infrastructure connectivity nodes. Third, providers of local loop Competition is key. So regulators should take a access (narrowband and analogue, such as tradi- permissive approach to licensing multiple finan- tional copper wire connections, or broadband cially sound providers (owners and resellers) of and digital, such as digital subscriber lines [DSL], telecommunications infrastructure for interna- cable television modems, and fixed wireless ser- tional connectivity, alternative national long- vice). Fourth, ISPs, which provide Internet ser- distance networks, and local loop access. To vices to customers using these layers of networks. ensure competition in the ISP market, regulators Expanding Internet access requires coopera- should require no formal licensing for ISPs; sim- tive behavior by these players, and regulators ple registration should suffice. have a key role in ensuring such behavior. A reg- The biggest potential bottleneck for Internet ulatory strategy for doing so focuses on promot- access is the local loop. The local loop has mostly I N T E R N E T A C C E S S REGULATORY LEVERS FOR A KNOWLEDGE ECONOMY been analogue copper telephone lines, owned sion of high-frequency portions of loops for DSL and provided by the monopoly incumbent service (ITU 2001). By late 2002 more than 40 telecommunications operator. Copper wires are countries had mandated local loop unbundling not suitable for moving large volumes of data (ITU 2002b). cheaply and quickly. Improving local access therefore requires providing alternative local Enabling viable Internet service providers broadband access (through cable television net- To ensure that ISPs can be viable, regulators need works, fixed wireless, fiber optic, and other tech- to guarantee a fair and competitive market for nologies) or upgrading the quality of the copper the services ISPs need, such as leased lines and 2 loop with DSL technology and unbundling it by local loop access. Most ISPs depend on incum- opening it to use by competing providers. bent operators for their services. High costs for The constraints in the local loop have led to these services can threaten ISPs’ commercial via- increasing recognition that competition in the bility and mean higher prices for end users. An local loop is a prerequisite for effective competi- effective regulatory regime for interconnection tion in broadband services—and that regulators and infrastructure sharing would ensure that all can use this competition as a lever to unlock the interested operators can use existing facilities at potential for broadband services. A case in point prices that reasonably reflect costs, avoiding is the experience of the Republic of Korea, a world undue duplication of networks and undue com- leader in broadband, which shows that ensuring petitive advantage for incumbents. competition not only between but within access Interconnection prices and conditions largely technologies accelerates the development of the determine whether competition will emerge and broadband network. A market with multiple serv- ISPs will succeed. Good interconnection frame- ice providers for each type of access technology— works promote efficient infrastructure develop- such as cable modem, DSL, fixed wireless, ment by providing proper incentives for fiber-optic cable, and local multipoint distribu- operators to build their own networks and to use tion systems (LMDS)—is more competitive than parts of others. Bad ones can act as barriers to a market with just one provider for each. competitive entry, undermining investment in Regulators could also use the unbundling of new infrastructure and depriving the public of the local loop from incumbent local carriers to innovative service options (ITU 2002b). The unlock the potential of broadband as well as to United States and Korea both have interconnec- promote the development of alternative service tion regulations supportive of ISPs. The U.S. reg- providers. Unbundling lowers both economic ulator requires incumbents to provide key and technical barriers to competitive entry by infrastructure to ISPs and new entrants at rea- precluding the need to build duplicate net- sonable rates, allowing them to be profitable. The works. Broadband and other alternative service Korean regulator obliges dominant telecommu- providers can build some elements of the net- nications operators to provide cost-based inter- work while leasing others from the incumbent. connection services to other operators and to Regulatory action is also needed to ensure that value-added service providers such as ISPs. access to low-priced unbundled components ISPs could also ensure cost-efficient inter- does not prevent the development of competi- connection and traffic exchange by entering tion from alternative networks in the longer into peering agreements with other ISPs. Under term. these agreements an ISP with its own backbone In Singapore the incumbent operator, network allows traffic from other large ISPs in SinglTel, must offer other operators local loops, exchange for access to their backbones on a including feeder and distribution plant, the dis- settlement-free basis. Where there is a big size tribution point at a building, and, in some cases, difference between ISPs, a transit agreement inside wiring. For unbundling to be even more provides an interim step toward peering. Under effective, the incumbent should also be required this kind of agreement a smaller backbone oper- to offer access to main distribution frames in local ator pays a larger operator a line access charge switching centers and “line sharing,� the provi- for wholesale access to the Internet. What regulatory actions are needed to pro- Flat-rate tariffs for Internet access in mote infrastructure sharing? International Box the United Kingdom experience suggests that they include requiring incumbents to publish timely and easily accessi- ble information on the location of infrastruc- ture (such as ducts and towers) and the capacity 1 A big reason for the greater use of the Internet in the United States is the requirement that local phone com- panies charge a flat-rate tariff. The United Kingdom is following suit. Its telecommunications regulator, Oftel, available for sharing and to develop clear guide- has ruled that the incumbent fixed line operator, BT, lines for pricing shared infrastructure and co- must offer other licensed operators wholesale fixed-rate locating the equipment of competitors and the tariffs for unmetered Internet connections at regional 3 incumbent. Also important are regulatory safe- exchanges. This scheme allows operators to pay for guards such as requiring each operator to make Internet connections per port rather than by metered infrastructure capacity available to all interested bandwidth. And because ISPs know the costs, they can operators (including itself) on a nondiscrimi- offer flat-rate Internet access to their customers. natory basis and requiring regulatory approval of rules for rationing scarce capacity. directly with the global Internet backbone, the costs of doing so remain high. The high prices of Lowering the cost of local access international connectivity have been attributed The pricing structure for access to the commu- to many factors, including the use of expensive nications infrastructure plays a big part in deter- transmission mediums such as satellite links and mining access to the Internet, its level of use, the lack of competition in the market for such and the development of e-applications. Per- connectivity (ITU 2002a). To increase competi- minute phone charges (on top of per-hour tion, regulators could foster access to a broader Internet access charges in some cases) discour- range of high-speed and high-bandwidth inter- age extensive use of the Internet. By contrast, national providers—especially fiber-optic net- flat-rate access to the infrastructure and the works and satellite operators. Regulators could Internet encourages greater use of the Internet, also consider imposing requirements to allow promotes migration to faster, “always on� solu- new entrants connectivity options equal to those tions available through broadband, and gener- of incumbents. ates demand for new interactive services and The limited availability of leased lines and content, catalyzing e-applications. their high prices in many developing countries Pricing thus calls for policy and regulatory are another major constraint on international intervention. While the Organisation for connectivity. There is thus a clear need for regu- Economic Co-operation and Development rec- lators to ensure that markets move toward more ommends against regulatory tariff setting, it does competitive supply and cost-oriented prices. recommend policy support for tariff options Another recommended solution to the high favorable to “always on� capabilities as well as sup- cost of international connectivity in developing port for competition in infrastructure, the countries is to use Internet exchanges to aggre- unbundling of local loops, and the competitive gate demand for international bandwidth. Most development of high-speed access options. The industrial countries have allowed private United Kingdom and the United States are companies to establish transparent and neutral among the countries that apply flat-rate pricing exchanges of ISP traffic locally. These exchanges, for local calls (box 1). Other countries price or network access points, improve the perform- Internet traffic at lower rates than telephone calls. ance of national infrastructure and increase the efficiency of the use of international bandwidth Lowering the cost of international access while reducing costs to ISPs. To maximize the Prices for bandwidth to access the global economies of scale offered by network access Internet backbone fell significantly in most points, regulators need to take actions to reduce industrial countries in the late 1990s, but the the prices of backbone services. Pooling interna- same cannot be said for developing countries. tional access (bandwidth) can also reduce access Even in countries allowing local ISPs to connect costs to providers. A good example of this practice I N T E R N E T A C C E S S REGULATORY LEVERS FOR A KNOWLEDGE ECONOMY is the Irish government’s purchase of large capac- Performance improvements from ity (from Global Crossing), which it then sells to Box service level agreements in Ireland small providers at low cost. Maintaining quality The quality and speed of Internet access play an 2 Ireland’s telecommunications regulator has required the fixed line incumbent operator, Eircom, to provide carrier services to other licensed operators. Service level agree- viewpoint ments (SLAs) set out the minimum quality standards increasingly important role in the extent to which Eircom must meet in providing these services (delivery the Internet is used, especially for business trans- times, delivery process points) and the penalties it must is an open forum to actions.1 Improvements in service quality nor- pay if it fails to meet them. Such agreements also cover encourage dissemination of mally follow the introduction of real competition, delivery of leased lines and ISDN (integrated services public policy innovations for as service providers compete with one another to digital network) services to other licensed operators. The private sector–led and attract and retain customers. But if there is too lit- SLA framework has led to big improvements in Eircom’s market-based solutions for tle competition among infrastructure providers, performance: delivery times for leased lines fell from 54 development. The views competing service providers may find themselves days in February 2001 to 16–20 in March 2002. published are those of the constrained by the quality of the infrastructure, authors and should not be typically provided by the incumbent operator. attributed to the World Regulators can promote better quality by requir- face-to-face or even telephone transactions. And Bank or any other affiliated ing incumbent infrastructure providers to offer merchants and consumers all over the world are organizations. Nor do any of service level agreements (SLAs). As the experi- discovering that the digital environment strains the conclusions represent ence of Ireland shows, a properly constructed SLA the rules and laws of conventional commerce. official policy of the World can benefit users (box 2). For all these reasons caution and even distrust Bank or of its Executive have slowed the development of online transac- Directors or the countries Supporting diffusion tions. Governments need to address the lack of they represent. Putting in place a pro-competitive market struc- legal certainty by establishing clear policies and ture might not ensure Internet access in all regulations on such key issues as taxation, digital To order additional copies areas. Closing the gaps in access might require signatures, electronic payments, electronic secu- contact Suzanne Smith, specific measures like those taken by regulators rity, and protection of privacy, consumer rights, managing editor, Room I9-009, in Chile, Estonia, Malaysia, and Korea. and copyright and intellectual property rights. The World Bank, In Chile the regulator established a universal 1818 H Street, NW, Internet access fund to subsidize service provi- Washington, DC 20433. sion in rural, remote, and low-income areas that might be unattractive to competitive market Note Telephone: players. Estonia made Internet access for every 1. See Analysys Consulting (2002) for more detailed 001 202 458 7281 citizen a constitutional right. As a result, all treatment of this subject. Fax: schools and many public libraries and munici- 001 202 522 3480 pal centers are connected to the Internet. In References Email: Malaysia the Communications and Multimedia Analysys Consulting. 2002. “Telecom Infrastructure ssmith7@worldbank.org Commission recently initiated the Collective Development for Corporate Data in the MENA Region.� Internet Access program to promote installa- Report prepared for the World Bank, Information and Copyedited and produced by tion of adequate Internet access technologies in Communications Technology Department, Washington, Communications all communities. Korea mandated universal D.C. Development Inc. access at a speed of 2 megabits a second. ITU (International Telecommunication Union). 2001. “Effective Regulation: Case Study—Singapore.� Geneva. Printed on recycled paper Setting up a legal and regulatory framework ———. 2002a. “Competition Policy in Telecom- for electronic transactions munications—Background Paper.� Geneva. Laws and regulations relating to Internet trans- ———. 2002b. Trends in Telecommunications Reform. actions need to be modernized in order to build Geneva. trust in the Internet as a medium for carrying out business. Electronic transactions are far more impersonal, anonymous, and automated than This Note is available online: http://rru.worldbank.org/Viewpoint/index.asp