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of the Costa Rica Telecommunications Market
International Trade in Services Negotiation Simulation
Updated May 2003 by:
Tyler Hoffman/Jeanah Lacey/Olumide Adekoje/Maria Chan
This simulation is based on a Master’s in Commercial Diplomacy Project completed at the Monterey Institute of International Studies by Andrew Dyer
Background, Facts and Issues Common to All Parties
Following is information and assumptions that are common to all parties in this negotiation simulation. They are intended to help set the parameters of the negotiations and give participants and initial point of reference before formulating positions within their respective stakeholder groups.
currently underway to liberalize
The introduction of foreign competitors into the Costa Rican telecommunications market requires a constitutional amendment to dissolve the current state-owned utility company’s monopoly position in the market. The current Costa Rican telecommunications service provider is the Instituto Costarricense de Electricidad (ICE), known as the “National Utilities Company” in English. Such an amendment requires an overwhelming (2/3) majority of votes in the Legislative Assembly, which is comprised of fifty-seven deputies.
Telecommunications reform has become a notoriously difficult political issue for the current administration. President Rodriguez came into office intending to reform the telecommunications sector, and he introduced privatization legislation several years ago. That legislation was defeated despite the fact that the President and prominent leaders from the business community all supported the effort.
In a new attempt to pass reform legislation, Rodriguez recently began a process of national consensus building designed to minimize political gridlock. The process has already resulted in the creation of a law that would gradually open the telecommunications market to outside competitors. While the process has not succeed in dampening the spirit of opposition leaders, both major parties have agreed to introduce a compromise bill on the floor of the assembly. If passed, this bill will open the telecommunications market to foreign competitors yet maintain the national utilities company as a state-owned enterprise.
Now that both parties have committed to this debate, momentum seems to be building and the outlook for the passage of a compromise bill is positive. The likely result will be an opening of the Costa Rican market in which the state maintains some stake in the operation of the national utilities company. The exact nature of the relationship between the Costa Rican government and the new national utilities company is not yet clear, making it imperative that GlobalCom push for rules that will create a level playing field for foreign competitors and that other stakeholders analyze their interests and understand where they may gain or lose if further reform legislation is made law.
For the sake of this simulation, the following assumptions will be made:
· As mentioned, efforts are being made to present legislation that will result in the liberalization of the Costa Rican telecommunications market. Past attempts to present similar legislation have failed.
· In order to create new draft legislation, stakeholders have decided to meet to draft a comprehensive Memorandum of Understanding (MOU) that will be used as a basis for legal text regarding the liberalization of the Costa Rican telecommunications market.
If negotiations are successful, the leadership of both major
political parties in
GlobalCom stands to gain approximately five million dollars annually in
a liberalized telecommunications market in
market potential in
77 million minutes of international long distance telephone calls originate
The profit potential for providing telecommunications services to Internet service providers (ISPs) is extremely difficult to determine due to a fundamental lack of data on prices. In order to arrive at a figure, it will be assumed, once again, that GlobalCom will secure one-quarter of the market. It is highly likely that GlobalCom can secure a much larger portion than this due to its new emphasis on providing extremely high quality telecommunications services on a global scale.
One-quarter of the current ISP market would equal approximately 815 ISPs. It is important to note, however, that while the number of ISPs has stabilized somewhat over the past two to three years, the number of Internet users has grown tremendously, providing a particularly optimistic forecast for this market (see Figures 3 and 4). If GlobalCom charges US$1,000 as a start-up fee for ISPs that switch to its service (this would include a complete overhaul of the ISP’s current system and connection to GlobalCom’s worldwide state-of-the-art network) and a $100 average monthly fee (this fee would vary, of course, depending on the number of Internet users hosted by each ISP), the total intake from one ISP per year would be $2,200. Multiplying this number by one-quarter of the market brings the total gross yearly income to $1,793,000.
Of course, this only represents the first year’s annual gross revenue. It is important to look at the rates at which each of these markets is growing in order to get a sense of just how much may be earned in the future.
Although the initial boom in new Internet users and ISPs has tapered off, both have continued to post impressive positive growth rates over the last several years (see Figure 5). The international long distance market shows a relatively more stable pattern of growth (see Figures 1 and 2), which is to be expected from an older and more established industry. As the market for Internet technology develops, growth rates can be expected to even out.
The Economics of Telecommunications Reform: Why
is introduced into
As a state-run
and state-supported entity, ICE lacks a commercial incentive to provide
the best possible services at the lowest possible cost. It also lacks
the financial ability to invest in the acquisition or development of new
infrastructure. As a state-run institution, it is subject to fiscal restraints
that slow the introduction of new technology, which is particularly problematic
since the cost of maintaining a state-of-the-art telecommunications network
is skyrocketing. Satellite, cellular, and information technologies are
changing at breakneck speed. The longer that
Opening up the telecommunications sector to private telecom service providers would have several positive effects on the Costa Rican economy. First and foremost, the unsatisfied demand for telecommunications services would rapidly shrink as providers soak up those tens of thousands of customers who have been awaiting service for weeks or even years.
unsatisfied demand for telecom services is soaked up, free-market competition
will begin to change the face of
also have an economic incentive to provide service to those who were previously
not served by ICE due to geographic or other restrictions. Numerous communities
Costa Rican businesses will also benefit from liberalization. As the telecommunications infrastructure becomes more efficient, teledensity increases, prices drop, and service quality improves, Costa Rican businesses will find themselves wasting less time and money in dealing with an inefficient telecommunications system. They will also find that it is easier and cheaper to communicate with customers and business partners—particularly those who are located in foreign countries.
be the most significant result of telecommunications liberalization is
an increase in foreign direct investment. Indeed, attracting foreign investment
has been a major goal of the Rodriguez administration, and a principle
Once the telecommunications sector is liberalized, and service quality, prices, and reliability improve, Costa Rica will be far more attractive to foreign companies wishing to establish themselves in Central America. Concerns over the declining quality of telecommunications (due to insufficient investment by the Costa Rican government) will transform into a recognition that open competition in the telecommunications sector will continue to provide high quality service at a reasonable price. Foreign investors will appreciate the stability that comes with a competitive market.
Of course, liberalizing the telecommunications sector will also attract telecommunications service providers who will need to hire a wide assortment of workers in order to operate in Costa Rica. Workers at ICE who are concerned about losing their jobs may be able to find work at a foreign telecom provider once liberalization occurs. In fact, scholars have found that telecommunications liberalization tends to have a positive effect on employment.
Legal and Political Analysis of Telecommunications Reform
The ICE enjoys a legally-mandated monopoly for the provision of telecommunications services. Only a constitutional amendment can dissolve this monopoly.
In Costa Rica, constitutional amendments require a two-thirds majority vote in the Legislative Assembly. They must also pass a second vote in the Legislative Assembly during a later session, which means that the process of amending the Constitution is lengthy, particularly because before a bill reaches the floor of the Assembly, it must go through a review process similar to the U.S. Congress’s committee process.
Costa Rica’s constitution and campaign finance laws have created a virtual two-party system with a strong Legislative Assembly and a relatively weak executive. The state contributes funds to the electoral campaigns of parties that win five percent or more of the vote, which makes it difficult for candidates from third parties to break into the system. This makes for a wide range of views within a single party and reduces the influence that parties have over the voting habits of their deputies. Furthermore, votes on the floor of the Assembly are rarely recorded or publicized, and there is little repercussion for crossing party lines. All of this gives deputies significant latitude in their voting habits and makes them prime targets for lobbying activities.
President Rodriguez’s previous failure to pass privatization legislation is evidence of the relatively diminished role of the president in Costa Rican politics. He is able to introduce legislation, but cannot necessarily muster a two-thirds majority vote through his efforts or influence alone. Rodriguez has used the power of the executive to determine the agenda of the current extraordinary legislative sessions in order to focus attention on the issue of telecommunications reform, but even this will not bully opposition leaders into making large concessions.
The key to achieving the required two-thirds majority is to form a multi-party, multi-stakeholder consensus. In order to build such a consensus, voters and local Costa Rican interest groups need to be pulled into the campaign for telecommunications reform. Indeed, any steps toward de-politicizing the issue will undoubtedly speed up the process, which has been held back more by political interests than by problems related to substantive issues. Both major political parties support telecommunications reform, but they differ on issues of how that reform should be carried out.
date, the debate over telecommunications reform has focused on the pace
of liberalization and the nature of the state’s involvement in a liberalized
market. Very little has been made of the issue of a level playing field
other than to say that the telecommunications market should be truly competitive.
President Rodriguez is a member of the Social Christian Unity Party (PUSC) and has supported telecommunications reform since the beginning of his presidency. The opposition party, the National Liberation Party (PLN), has blocked all of his attempts at reform, although the parties almost reached agreement on several occasions.
To try to break the deadlock between the parties, President Rodriguez initiated a process of national consensus building in which interest groups from various business sectors and society were invited to provide input into the telecommunications reform process. A formalized process for considering this input produced a piece of legislation, which was essentially a compromise between Rodriguez’s attempts to fully privatize the telecommunications industry and conservatives’ efforts to maintain the national utilities company as a state-owned monopoly. The law did not make it through the committee process intact, but it did bring the Rodriguez administration and the opposition much closer together, and it established a cooperative process for the first time. Subsequently, the Sub-Committee on Utilities Reform came out with its own compromise bill, which brought the issue closer to resolution than perhaps ever before. However, this legislation did not pass a vote.
Specifically, the compromise legislation takes into account concerns over profit utilization and the gradual opening of the market. The bill called for:
· A three-stage process of liberalization that is subject to review by an oversight entity;
· ICE to become a quasi-private entity;
· ICE to use 100 percent of its profits in order to develop its business for up to five years (after which deputies will revisit the issue of profit utilization);
· The executive to develop a National Plan for the Development of Telecommunications; and
· Creation of a quasi-governmental regulatory agency that will sell radio frequencies concessions and monitor for (and respond to) anti-competitive behavior.
The bill states that one of its objectives is to "increase the participation of businesses in the market of telecommunications through the promotion of effective competition in the provision of domestic and international telecommunications."3 In Article 126, it discusses the promotion of competition with regard to telecommunications:
The sustainable development of public telecommunications services and their efficient provision will proceed through the gradual liberalization and promotion of effective competition.
It is understood that effective competition does not exist when an operator or group of them displays a market power that gives them the ability to significantly influence the price or rate of the public telecommunications services, harming the rights of its users and obstructing the entry and encouraging the exit of new operators or users of the services, in conformity with that established in articles 195, 196, and 197 of this law.4
Opposition leaders are already planning to attack new legislation, and members of the sub-committee that approved the first proposed bill have even said they will not give it their full support on the Assembly floor. To effectively counter this opposition, GlobalCom will likely begin a comprehensive lobbying effort. Keeping in mind the two priorities for GlobalCom—market opening and fair competition—the company should push for the introduction of stronger language that would protect open and fair competition and limit the state’s involvement in supporting ICE. Indeed, the bill needs to go further than it currently does to ensure that there will be a level playing field among all competitors both foreign and domestic. It must specifically outlaw government bailouts or subsidization of ICE, and it must specifically allow for the failure of ICE. That is to say, each participant in the market, including the state-owned provider, must operate under the same levels of risk and uncertainty.
In terms of creating language for legislation, deputies must be convinced that such language is in Costa Rica’s best interests. Any proposed legislation regarding telecommunication reform will first be heard by the Subcommittee on Utility Reform, a subcommittee of the Committee on Government and Administration within the Costa Rican legislature. Both the PUSC and the PLN have party members active on this subcommittee. If any legislation is to be accepted by this committee it will be important to emphasize that the benefits of competition will be maximized only if a large number of companies choose to offer services in Costa Rica and that multinational companies will be discouraged from entering the market if they believe that ICE is maintaining an unfair advantage over its competitors. Only the strictest language that guarantees a level playing field will assuage these concerns.
Telecommunication Reform and the WTO
There are several relevant bodies of WTO law that are important for this simulation, they are the GATT, the General Agreement on Trade in Services GATS and the WTO Basic Telecommunications Agreement. By signing onto the Basic Telecommunications Agreement, Costa Rica will demonstrate to foreign investors that it is serious about reform and that their investments in telecommunications cannot be wiped out by a rapid change in government policy.
If Costa Rica were to sign the WTO Basic Telecommunications Agreement, it would first have to specify exactly what sort of commitments it is prepared to take on, which would require consideration of a whole host of technical details that the current legislative session is not ready to debate. Inserting language that even states the intention to sign the agreement might dissuade support from deputies who would otherwise vote for liberalization. At this point, it is advisable to simply mention the agreement as another avenue for showing foreign investors just how committed Costa Rica is to the reform process.
It should be stressed that the WTO Agreement does not lock Costa Rica into anything that it is not including in its own law. Costa Rica could simply come up with a schedule of commitments that repeats the language of its own law. Signing the WTO agreement will help attract foreign telecommunications investment by showing foreign service providers that they can expect the Costa Rican market to remain stable.
Background on the WTO General Agreement on Trade in Services
The General Agreement on Trade in Services (GATS) is one of the key agreements administered by the World Trade Organization. It is designed to “secure progressively higher levels of liberalization of trade in services through successive rounds of negotiations, which should aim at promoting the interests of all Members of the WTO and at achieving an overall balance of rights and obligations” (Article XIX of the GATS).
The articles of the GATS, and a set of Annexes, establish some general rules for government measures that affect trade in services. In addition, national schedules of commitments set out specific commitments by each member country. The schedules are an integral part of the Agreement, as tariff schedules are an integral part of the GATT. While the text of the Agreement applies uniformly to all Members of the WTO the scheduling of commitments is negotiated by each Contracting Party (member countries or customs territories) with every other Contracting Party.
The text of the GATS consists of 6 parts:
The GATS does not define "services" but does define "trade in services". The definition covers not only the cross-border supply of services but also transactions involving the cross-border movement of capital and labor. Paragraph 2 of Article I defines trade in services as the supply of a service through any of four modes of supply:
4 modes of supply:
through commercial presence
through the presence of natural persons
under the GATS
Transparency: GATS Members are required, inter alia, to publish all measures of general application and establish national enquiry points mandated to respond to other Member's information requests.
National Treatment: In any sector included in its Schedule of Specific Commitments, a Member is obliged to grant foreign services and service suppliers national treatment unless it lists the nonconforming measure in its national schedule. National treatment is defined as treatment no less favorable than that extended to its own like services and service suppliers. In this context, countries commitment themselves not to adopt any law or other measure that would give its services or services suppliers a competitive advantage through more favorable treatment.
of Specific Commitments
The GATS does not impose the obligation to assume market access or national treatment commitments in a particular sector. In scheduling commitments, Members are free to tailor the extent of the commitments they take so as to avoid or modify obligations that they consider too demanding at present.
Article XVI sets out six types of government measures that are covered by a market access commitment, unless the government lists an exception. They are:
Article XVII deals with national treatment. It states that in the sectors covered by its schedule, and subject to any conditions and qualifications set out in the schedule, each member shall give foreign services and service suppliers treatment, in measures affecting supply of services, no less favorable than it gives to its own services and suppliers.
Any market access or national treatment obligations inscribed in schedules must be granted unconditionally to all Members, without discrimination. Countries are allowed at the time of accession t list specific exceptions to this requirement. Parties to a Free Trade Agreement are not bound to give Parties that are not signatories of the Free Trade Agreement the same treatment. Also, countries are allowed to negotiate agreements for the mutual recognition of standards, though they have to give the same opportunity to other member countries.
Pursuant to Article XXI, specific commitments may be modified through negotiation after three years.. However, countries that are affected by such modifications can ask the country making the adjustment to make an equivalent commitment in another area.
Services schedules consist of both sectoral and horizontal sections. The "Horizontal Section" contains limitations that apply across all sectors included in the schedule. They often refer to a particular mode of supply, notably commercial presence and the presence of natural persons. The "Sector Specific Section" contains limitations that apply only to the particular sector, sub-sector or activity to which they refer.
has not, or not yet, been covered in the GATS?
Other types of government measures have been put into the GATS work program, though detailed rules are yet to be negotiated:
Negotiating Techniques with Respect to Services
and Optimistic - negotiators must continue through difficulties, believing
that the end result will be worthwhile.
Trade Negotiations in Services
BACKGROUND ON CONDUCT AND ORGANIZATION OF SIMULATION
THE NEGOTIATION PROCESS
The parties to these negotiations will be provided with individual team
instructions and facts common to each country team's interests.
Individual interest groups (e.g., associations, government agencies, etc.)
will meet first to review facts, develop team negotiating goals and strategies,
assign research and negotiating roles, and to document all negotiating
All interest groups will then meet with their country team members. (Country
team members may or may not share common interests, goals, etc.) Lead
government agencies will seek to reconcile differences and to advance
a unified voice in the bilateral or multilateral sessions.
All teams will seek to advance specific negotiating goals and interests.
For example, it can be assumed that China seeks acceptance in the
international trading community, that it would like to avoid a dispute
in the WTO, and that it is committed to an increased level of enforcement
in the area of intellectual property rights. Similarly, it can be assumed
that the US, EU, and Swiss governments and constituent manufacturing groups
seek enforcement of IPR laws in China and greater access to the Chinese
market. Interest groups may differ, however, on appropriate timetables,
implementation mechanisms, and enforcement.
All parties will want to consider some or all of the following:
It will also be important to determine the interests of your counterparts
including adversaries and allies. You will want to try to build alliances
within your country and with other country governments or individual
CONFIDENTIAL PARTY INSTRUCTIONS
individual team (interest group) will be provided with further confidential
instructions issued from the perspective of a superior corporate, governmental,
or military officer. You are to design your negotiating strategy in accord
with the instructions. Questions regarding instructions or the terms of
agreements reached can be reviewed with one of the instructors.
SKILLS AND TECHNIQUES
TO ENHANCE THE LEARNING GOALS OF THE SIMULATION
Because time is extremely limited, the instructors request that students
abide by the following rules which have proven effective in other negotiation