Creation of a Separate Telecom Regulatory Agency: A Duration Analysis of Its Time Pattern

I. INTRODUCTION Privatization of state-owned telecom enterprises and the introduction of effective competition in the provision of telecom services have long been key principles in telecom sector reform. However it was not until the World Trade Organization (WTO) Agreement on Basic Telecommunication Services in 1997 that the importance of regulatory fundamentals was formally addressed in the context of multilateral international trade. At the center of the issues set out in the WTO agreement was the creation of separate telecom regulatory agencies that employ transparent and fair regulatory procedures to promote competitive safeguards of private investment and nondiscriminating interconnection to essential facilities for the public telecom network. There are many reasons for separating regulatory functions from the operation/provision of telecom services as well as from the relevant government ministries. (1) First, assets in the telecom sector are highly product-specific, and investments are not easily redeployable without significant losses. Therefore, introducing a regulatory institution that ensures the protection of both domestic and foreign private investments from any potential opportunistic behavior of the government is considered vital to the creation of an environment that is conducive to long-term investments (see Smith and Staple 1994). Second, the creation of a regulatory body separated from the operation of telecom services could be an important instrument to enhance the efficient and fair allocation of resources in the telecom sector. Facing growing infrastructure privatization and market liberalization, it is important to establish a regulatory institution with a legal mandate and functional autonomy to support private investment and competition in telecom sector (see Stern and Trillas 2003). Especially in the presence of dominant incumbent telecom service providers, the importance of creating a separate regulatory body is even more pronounced not merely because it could help level playing fields among telecom operators but because it helps prevent regulatory capture by the telecom operators (see Estache and Martimort 1999). To date, there have been many country-level empirical studies that examine ex post impacts of regulatory reforms on telecom sector performance. For instance, Boles de Boer and Evans (1996), Petrazzini and Clark (1996), Boylaud and Nicoletti (2000), and Wallsten (2001) explored the effects of separate regulation on telecom sector performance in conjunction with other telecom policies, such as privatization or competition. (2) In addition, building on the new institutional economics approach, there have been a few applied studies on regulation of telecommunications. For example, Levy and Spiller (1996) examined in a five-country case study the relation between the regulatory regime, utility performance, and institutional characteristics. Estache and Martimort (1999) investigated the influences of regulatory structures and processes on regulatory outcomes in the light of transaction costs. Recently Stern and Trillas (2003) compared the credibility issues of regulatory agencies for telecommunications with that of a central bank operating national monetary policies. The existing telecom literature, however, has made little efforts to investigate why the establishment of separate telecom regulatory agencies varies across different stages of economic development and different regions. The notion of endogenous regulation--the performance of a country's telecom sector affects and is affected by its regulatory characteristics--dates from the early 1990s and has been increasingly applied to telecom policy analyses (see Gutierrez 2003). For instance, Smart (1994) argues that a country's telecom regulatory environment is an important determinant of its telecom sector performance, whereas changes in regulatory structure are partly attributable to the telecom sector's performance and telecom operators' strategic decisions. …