OECD Says No to Aid for Debt Ridden Telcos

Confidence is slowly returning to the telecommunications sector after the "boom and bust" years of the 1990s. Although the necessary restructuring now underway in the industry is painful, a new Organisation for Economic Cooperation and Development (OECD) study says governments and regulators should resist the temptation to provide relief to companies by easing competition requirements or by providing financial help.

The study says that the current state of the industry in OECD countries does not justify a major shift in telecommunications regulatory policy as a way of encouraging new investment. Indeed, competition is still hampered in some market segments, particularly high-speed internet access, which deprives consumers and businesses of some of the benefits of technological innovation.

The OECD paper adds that the slow return of confidence is being aided by the efforts of companies to strengthen their balance sheets and to renegotiate their debts. The impact of such restructuring on the overall economy of a country is small as the weight of the sector is, in general, relatively limited at between 2% and 4% of gross domestic product. While the effect on equipment suppliers and technology firms has been severe, adjustment in the sector is largely behind us.

Because of robust demand from consumers and businesses, the telecommunications services and equipment sectors should return to steady growth once financial restructuring is completed, the study adds.

The OECD paper also says that the price at which European Union governments auctioned third generation UMTS mobile telephony licences (about US$100 billion altogether) was only one of several factors contributing to the current financial pressure on firms. Recognising that the prices obtained at the later auctions were far lower than those achieved at the first licence sales in Germany and Britain, the study recommends that care should be taken in designing auctions so that they achieve their primary goal of opening markets to competition.

The study also suggests allowing the spectrum of frequencies allocated for UMTS to be resold by operators as a way of opening up the market to new entrants. But the study urges caution. Changing the rules over secondary market trading after allocating rights could be seen as providing the equivalent of a government subsidy as those rights could become more valuable than the prices set at the auctions.

The report, which draws on work to be published in the forthcoming OECD Communications Outlook in May 2003, will appear as a special chapter in the OECD's forthcoming Economic Outlook No.73."

Posted to the site on 7th May 2003