Private Investment in Telecommunications: an Economic Stimulus

Private investment is an essential part of economic recovery and must be encouraged, according to Canada's Montreal Economic Institute (MEI). "Private investment totals more than $270 billion annually, nearly 10 times as high as the public investment announced in the recovery plan in the federal budget", MEI president and CEO Michel Kelly-Gagnon said.

An Economic Note published today shows that the telecommunications sector in particular would benefit from a reduction in obstacles to investment. The Canadian Radio-television and Telecommunications Commission (CRTC) forces telephone companies to share their telecom networks with competitors, the study points out. This policy deters private investment, thereby undermining job creation efforts.

"The development of next-generation networks requires huge investments", Mr. Kelly-Gagnon noted. "Without well protected property rights, a company will refuse to invest the millions needed because it knows that its competitors will be able to benefit from this against its will ". The result is that hundreds of jobs will never materialize, he added.

Running counter to best economic practices

Economist Pierre Lemieux, author of the study Forced access to telecommunications networks, explains that the CRTC ruling goes against the teachings of economic theory, in particular the famous "Coase theorem" that earned Ronald Coase the Nobel Prize in economics in 1991.

Applied to the telecommunications sector, the Coase theorem states that it is preferable to let network owners and telecom companies negotiate with each other to determine who will control what, the author explained. An efficient company with a good business plan will be prepared to pay more to rent bandwidth. A network owner will gladly rent part of its network if it can receive a higher price than what it bills its own customers, said Mr. Lemieux, an associate professor at the Département des sciences administratives, Université du Québec en Outaouais.

In addition to favouring private investment, these free transactions lead to better use of resources by limiting market access only to companies that are efficient and thus creators of wealth, the author added. "Political and bureaucratic processes, in contrast, are incapable of determining whether or not the entry of a new firm - through the rental of parts of a network - is efficient", he said. "Only market transactions can do this".

Such exchanges already occur in the telecommunications industry, Mr. Kelly-Gagnon stated. "More than half the revenues the major telephone companies get from their wholesale activities come from services they are not obliged to provide. Moreover, before the government got the idea of imposing the sharing of cellular antenna sites, more than one-third of this equipment was already being shared on a regular basis."

The MEI takes an interest in the issue of property rights in the telecommunications sector. The Institute will soon be publishing a study complementary to Forced access to telecommunications networks. The new study highlights the Network neutrality, a public policy proposal aimed at imposing directives on the owners of telecom networks regarding network uses and fees.

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The Montreal Economic Institute is an independent, non-partisan, not-for-profit research and education organization. Through studies and speeches, the MEI contributes to debate on public policy in Quebec and across Canada, suggesting reforms for wealth creation based on market mechanisms.

Posted to the site on 28th May 2009