Industry Restructuring and Regulation - Building a base for sustainable growth sector segments where monopolies have been retained. Tables 11 and 12 provide some evidence on this issue.

|**_Sector and Industry_**<br>**_R_**|**_ate_**_oe_**_retorn_**<br>b<br>_c_|_e)_|
|---|---|---|
|Electfricity distribution (regulated)|30||
|Electricity generation (competitive)|12||
|Basic telephony (regulated) b|18||
|rLo-ng distance (competitive)<br>-6.5|||
|_Source:_Table 8.1, Chile: Recent Policy Lessons and Emerging Challenges (1999)<br>_Note:_Some difference will depend on the risk faced by the industry, but this is unlike<br>For information on the different levels of risk faced by different industries (and under<br>Alexander, Mayer and Weeds (I 1996).<br>**]Wce**<br>j<br>j<br>**_1988_**<br>|ly to differ by suc<br>different regulat<br>i<br>**_1997_**|h a great degr<br>ory regimes) se<br>_Y._<br>**_%change_**|
|<br> <br> <br>Electricity distribution price (KWlh) (in current U.S.$)<br>9.44<br>||<br>12.00|<br>27.1|
|<br>Average household telephone bill (in constant Ch$ of June 1998)<br>7,773<br>|<br>111,403|46.7|
|_Source:_Table 8. 1, Chile: Recent Policy Lessons and Emerging Challe*nges (I1999)|||

_Note:_ Some difference will depend on the risk faced by the industry, but this is unlikely to differ by such a great degreea For information on the different levels of risk faced by different industries (and under different regulatory regimes) see Alexander, Mayer and Weeds (I 1996).

One of the reasons for this is the fact that the market structure has not been fully developed as a competitive market. In the case of telecommunications, the 1982 law established that open competition should exist in all segments of the telecommunications market, but no actions were taken to break up the two powerful monopolies that existed at that time (one covering local and the other national and international traffic). Furthermore, since a competitive philosophy had been adopted, no price regulation was proposed. The law was amended late in the 1980s, after the competition authority determined that the industry was still dominated by the original monopoly providers. Even by 1994, the five new entrants in the local telephony market had achieved only 2% of the market.<sup>17</sup> In the electricity sector there are also concerns about the concentration of ownership of generation assets, which is discussed in more detail in the following section.

# **Mexico**

During the late 1980s and early 1990s, Mexico undertook extensive reform in its transport sector. One of the key decisions was the introduction of full competition to the inter-urban transport sector. On average, freight rates fell, but there is concern that this may not be the result of competition but rather of predatory pricing. In one state, Oaxaca, the freight rate did not fall. Rather, an association of companies were sanctioned by the competition agency for following price-fixing policies.

So, stating that competition is to occur is, by itself, not enough. Real policies need to follow that involve both the encouragement of new entrants and also the control, whether through sectoral economic regulation or competition policy, of existing operators.

> A similar story is seen with the experience of the UK and telecommunications reform. Real competition, and the greatest benefits of reform, did not occur until the government decided to abandon its 'duopoly' approach that had allowed Mercury Communications to be established by Cable and Wireless as a competitor to British Telecom. Once the duopoly was removed, a significant number of new entrants appeared.

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