A new form of economic organization - let's call it "the Web
Economy" - is transforming the nature of global development. This
occurred with telephones and electricity, but this time the
transformation is happening with astonishing speed, scope and
mobility. Already, under the pressure of competition, the Web
Economy is transforming itself at an exponential rate, amounting to
over US$ 300 billion in the United States alone.(1)
The Web Economy is based on the use of telecommunications networks,
the Internet, and computers for high-speed processing and exchange
of information. This system is referred to collectively as
Information Technology (IT). Industrialized countries account for
only 15% of the world's population, but for 88% of all Internet
users, 56% of which are in the United States and Canada.(2) In this
take-off phase, it is clear that if a country does not participate
in the Web Economy early, it runs the risk of being left behind
forever. Non-participation will seriously threaten the fundamentals
of any economy, because the inherent mobility of the Web Economy
means that economic activities can shift at will to any
location.(3)
In the region, Lebanon, Jordan, Tunisia, Morocco, and Israel are in
the process of designing and implementing strategies to give their
economies a chance to participate in the Web Economy. The West Bank
and Gaza (WBG) could have a special advantage in this process,
since its human and financial resources are spread all over the
world. The Palestinian Web Economy could be the means of pooling
these resources to focus them on developing the Palestinian
economy, no matter where the resources are located. But, urgent
action is required to take advantage of the opportunities for
WBG.
There are physical and institutional keys to success. The physical
key is a high-quality telecommunications infrastructure capable of
moving high volumes of data at fast speed and low cost to provide
all customers with the connective links to the global Web Economy.
The institutional key is a legal and regulatory framework that
encourages and supports entrepreneurs to make long-term
investments. New investments will generate new products, services,
exports, and thereby, employment. Lack of investment will increase
the income and development gaps between those who participate in
the Web Economy and those who do not. Sadly, WBG does not yet have
these keys. Specific action is required immediately.
Competition in the Web World
High-quality, low-cost telecommunications infrastructure results
from the forces of competition, but competition itself brings about
many other advantages, not the least of which is innovation - a
defining characteristic of the Web Economy. Monopolies bring
stagnation, and in the Web Economy, stagnation results, very
quickly, in decline and, finally, exclusion.
The Palestine Telecommunications Company (PalTel) has performed
well in the construction of a modern, high-performance
infrastructure with approximately 250,000 customer connections,
shrinking waiting lists, and extending coverage to almost universal
access. These achievements are even more impressive given the
difficult circumstances in which PalTel has to operate. Private
investors have managed this vital expansion and they deserve a fair
return on their money.
Though PalTel's tariffs are attractive today in comparison to
nearby Arab states (but not in comparison to Israel), they are far
from best in class - and they need to be best in class for a global
market. This is particularly the case for leased lines (4) - an
essential facility for the Internet. The Web Economy demands
high-quality, low-cost telecommunications infrastructure. This is
found only where the major supplier faces the forces of
competition. The same goes for all of the various services that
make up the Web Economy.
The leaders of the Web Economy all face competition, and nowhere is
it possible to find a single supplier of all services - this is
beyond the reach of even Microsoft, AT&T, Nokia, France
Telecom, or Bezeq. In Lebanon, three operators (two of them
cellular) compete for the market. Jordan plans to issue additional
cellular licenses to encourage "broad band" businesses. There is
also competition in payphones, paging, and data communications. In
Egypt, there is competition in international services, and there
may be a third cellular license in the near future. In Israel,
Bezeq faces intense competition in international services and will
soon have to compete in all of its fixed services. Israeli
telecommunications charges are among the most competitive in the
world.
In the United Kingdom, more than 600 licensed public
telecommunications operators compete for business - something that
has helped the United Kingdom maintain its position as a leading
global financial services provider. Based on competition, language
skills, and the efficiency of the IT sector, Ireland has become a
major Web Economy. It is now an exporter of services, whereas once
it was better known as an exporter of people. Successes in the Web
Economy can be found, among others, in India, Malaysia, and Sri
Lanka. Experience everywhere shows that the forces of competition
will provide more and better quality telecommunications and IT
services, create more jobs, more products, more innovation, more
exports, more tax contributions, and will lower costs dramatically.
If it admits competition, WBG could be a player or a niche leader
in the Web Economy. If it does not, the gates of the Web Economy
will not open to it.
The Essential Legal and Regulatory Framework
Opening to the Web Economy and making the transition from monopoly
to competition will provide opportunities for additional
investments in WBG. There is capital and entrepreneurial ability
available, but investors will risk their money only when the "rules
of the game" are transparent, certain, and fair. The rules of the
Web Economy are established in sector-specific regulations and
general competition law. These are the institutional foundations of
success. International best practice (5) is to construct a
regulatory regime with the following essential elements:
* an independent regulatory authority;
* transparency in making and enforcing rules;
* competitive safeguards put into a competition law;
* objective, non-discriminatory, and transparent allocation of
scarce resources (e.g., frequencies, numbers, rights of way);
* public availability of licensing criteria - no secret
concessions; and
* an equitable interconnection regime that is fair to all
competitors and facilitates market entry.
All of the above are necessary for the development of a vibrant Web
Economy and IT sector. None of the above operates in WBG. The
Palestinian Authority (PA) has the responsibility of building the
economic foundations of a new state. This is the perfect time to
participate in the Web Economy. Because there is no certain and
transparent legal and regulatory framework in WBG, the development
of a dynamic IT sector will be severely handicapped. Unfortunately,
investors cannot put their money securely into Palestinian Web
businesses. First, there is no certainty as to the scope of the
exclusive rights of PalTel. This means that there are limited
opportunities for investment. Yet, it is not reasonable to expect
or to burden PalTel on its own, to develop the Palestinian Web
Economy.
Even where there are opportunities for investors, the legal and
regulatory framework is not adequate to ensure fair play. As long
as there is no independent, reliable regulator in WBG, there will
be a suspicion of favoritism (or worse) among investors. Whatever
investment may come is likely to be based on relationships, not
competitiveness. This type of investment will not be able to
compete outside WBG and so it will not participate in the global
Web Economy.
An Agenda for Urgent Action
The World Bank recommends a three-step plan of action to establish
a legal regulatory framework that will maximize the potential for
the growth of the telecommunications and IT sectors in WBG:
* a clear, pro-competitive policy statement designed to maximize
the commercial participation of WBG in the Web Economy;
* the establishment of a National Regulatory Authority (NRA)(6)
independent of operators and the Ministry of Post and
Telecommunications (on a day-to-day basis) whose function is to
implement the sector policy; and
* the enactment of a competition law to give the necessary powers
to the NRA.
The first key issue is to define clearly and openly the exact scope
and duration of a monopoly over any particular segment of the
market. All over the globe, exclusive rights are being terminated.
Where they exist, they are usually limited to basic voice services
and the network necessary to supply this particular service. All
other services and the supply of the relevant networks are then
open to competition.
Exclusive rights are also limited in time. Many decision-makers
have come to realize that it is impossible for a government to
deliver exclusive rights in the medium term in the Web Economy,
because technological advances continually provide new methods of
getting around monopolies and around any enforcement agency. Once
this is accepted, it is preferable to manage the process of
liberalization by an appropriate policy rather than allowing
activities to develop in a haphazard way.
Much of the uncertainty surrounding investment in the IT and
telecommunications sectors results from the controversy about
appropriateness and the interpretation of the exclusivity clause in
PalTel's license. That license apparently provides for PA
regulation of tariffs charged by PalTel (according to a price-cap
formula) and is supposed to ensure a fair basis for the
interconnection of present and future service providers to PalTel's
network. While it is essential to respect in full the rights of
PalTel, and to ensure that it receives fair regulatory treatment,
it is perfectly possible that PalTel and the PA can reach a
mutually satisfactory agreement to define clearly the scope and
duration of PalTel's exclusive rights. Such negotiations should be
aimed at increasing the possibilities for additional investors to
participate in the sector. Once there has been a clear public
clarification of the exclusive rights of PalTel, investors and
entrepreneurs may be expected to pick up quickly.
A second key shortcoming is the absence of an effective and
independent regulator. At a practical level, this is retarding the
IT sector in many ways. For example, without a transparent
licensing regime, investors are unable to consider entering the
market to provide services. Also, if a numbering plan is not
developed, investors cannot provide simple but profitable "free
phone" or "premium" services. Perhaps, most importantly, the
absence of an effective regulator means WBG cannot negotiate
effectively with other regulators.
The regulator has the duty to control tariffs in those services
where there are exclusive rights. In performing this function, the
NRA must establish a tariff regime that provides a reasonable
return to PalTel and encourage commercial development of Web
Businesses. Otherwise, WBG will not participate in the new form of
economic organization. Where PalTel faces effective competition,
there is no need for these regulatory controls.
A second regulatory function is the establishment of an equitable,
cost-based and non-discriminatory interconnection regime that would
encourage investors to use the digital highway of PalTel during any
period of monopoly. If the tolls for this highway are set too high
in relation to costs, entrepreneurs developing Web-based services
will invest elsewhere and Web businesses will not take off.
Alternatively, investors will find ways of bypassing the network.
In both instances PalTel will lose business. If the charges are set
below cost, then inefficient, unsustainable investment will take
place.
A third regulatory function is to develop, publish, and implement
licensing criteria so that investors can apply for licenses in a
transparent manner. The World Bank suggests two broad categories of
licenses. The first is a "Class" License, normally for liberalized
services like Internet service provision or any value added
service. The Class License is issued to all applicants meeting
pre-determined, non-restrictive criteria. The second is an
"Individual" License granted to major suppliers of fixed or mobile
services to the public. The Individual License specifies the
obligations and rights of the operator, which must be available to
the public, so that the terms of the license can be enforced in a
transparent manner. Also, the regulator must provide clear and
publicly available selection criteria for the Individual License so
that investors can evaluate opportunities.
Finally, there are certain key national resources, such as radio
spectrum and numbering plans that must be managed and allocated for
the benefit of all. In the special circumstances of WBG, such
management requires engagement with outside regulators.
Although the PA (through the Ministry of Post and
Telecommunications) has intervened on several occasions to deal
with tariff issues, it has not dealt effectively so far with
interconnection and licensing issues or the allocation of key
national resources. It needs to play a more proactive role in all
regulatory matters, in order to find ways to encourage competition
and establish a level playing field for all in the market.
The regulatory reforms described above need to be established on a
solid legal foundation. This is the third component of the
recommended reform agenda. A new telecommunications law would help
achieve WBG's goals of having a competitive and information-based
economy. The existing law (Law No. 3 of 1996) came into effect on
April 23, 1996. This law was then superseded by the issuance of
PalTel's License Agreement in November 1996. The new law should
establish clear, effective and transparent regulations for the
sector and help clarify the terms of PalTel's license, especially
with respect to the scope and period of exclusivity.
The process of competition focuses on giving customers what they
want, and has two aspects: competition among firms for customers,
and cooperation between firms working together with other suppliers
in order to compete. However, too little competition in the form of
monopoly or too much cooperation, especially in the form of
cartels, can severely disadvantage customers and the development of
the IT sector. Consequently, legal protection is needed to guard
against too much cooperation where there are no clear-cut benefits
to customers.
In other instances, the financial might and market position of one
firm may enable it to crush a smaller rival by, for example, a
deadly price war. In the Web Economy, a big operator may refuse to
cooperate, deny access, or impose harsh terms on a smaller
competitor for some essential material or facility. Without
reasonable access, the small firm will collapse, customer choice
will be restricted, and innovation, investment, employment, and
exports will all be strangled.
A competition law can provide the safeguards required of an
effective regulatory regime to prevent these types of actions and
the unconstrained exercise of market power. A competition law, if
enforced equitably, is an important essential requirement of any
modern economy, because it provides a degree of security against
anti-competitive behavior. The absence of such a law in WBG can be
a serious obstacle to participation in international transactions
and may be a serious obstacle to investment.
Legal and regulatory reform will provide a virtuous circle and will
encourage investment in the Web Economy. This will bring new
business to PalTel, whose existing network will carry Web traffic.
In turn, the Palestinian Web Economy will provide new jobs, more
exports, more tax revenues, and the link between Palestinian skills
and resources will spread throughout the globe. Equally, this
reform agenda will prepare WBG for participation in the
international community, because it will implement the principles
demanded for membership in international bodies such as the World
Trade Organizations, as well as those required of a modern
democracy.
An agenda of ad hoc reaction and inaction will leave the
Palestinians in the wilderness, outside the Web Economy, watching
others pass it by.
(1) A recent study by the University of Texas estimated that
the "Web Economy" generated more than US$300 billion in revenue and
created more than 1.2 million jobs in the United States in 1998.
The authors of the report stated the findings "seem to exceed all
prior estimates" astounding."
(2) In Israel there are approximately 1 million Internet users and
well over 200,000 customers.
(3) In Scotland there are 37,000 new jobs in call centers, more
than the total employed in the more traditional industries of oil,
gas, and fishing. In other cases, the manufacture of hardware
components, software, and the provision of IT services form the
basis of growth economies, especially in places where physical
resources are limited and human resources are of high
quality.
(4) For example, the "wholesale price" of major international
telecommunications carriers is as low as US$2.50 per year for a
transatlantic voice path. The Europeans recently recommended an
upper tariff limit of about US$350 per month for a leased 2Mbits
line of up to 5 kilometers in length.
(5) These elements are found in the WTO Regulatory Reference Paper,
which has been agreed to by more than 70 countries, including 42
developing countries.
(6) The competition law would apply to all sectors of the
economy.