Telecommunications Regulatory Design in Unstable and Small States

: The Case of Palestine

Abstract

Few months before the signing of the Oslo Peace accords between the Palestinian Liberation Organization and the Government of Israel, the Israeli civil administration lifted the restriction of having fixed lines installed on Palestinian households. Bezeq, the Israeli incumbent telecommunication operator started to roll out a copper-based fixed line network across the West Bank and Gaza and connected it with its fixed network in Israel.

On paper, this was the first time that Palestinians have run their own telecommunications network. In reality, just like all other economic and social aspects of life in the Palestinian Territory, Israeli restrictions on telecommunications still applied, causing an exogenous fragility for the Palestinian telecommunications sector. Control of spectrum frequency, restrictions on importing of equipment and installation of cabinets and antennas are example of Israeli restrictions.

On the other hand, the Palestinian Authority has been a huge disappointment as it has been riddled with poor record of public expenditures, poor investment in infrastructure, high levels of corruption, and low respect for the rule of law. The ICT sector was no exception even though its performance was/is far better than other industries. In particular, corruption and weak rule of law have allowed the emergence of “political businessmen”, who would set policies to monopolize markets, distort competition, and decrease consumers’ welfare.

The wave of regulatory reforms, which started in the developed countries, has affected the global telecommunications markets and developing countries followed regulatory reforms in a step to align their markets globally and attract investment. When other countries started to follow the US and EU’s regulatory reforms a debate was initiated on whether importing a regulatory framework regardless of a country’s intrinsic economic and social characteristics would be effective and produce the required goals, a debate that has its roots in what is known as legal transplants.

Both fragile and small states share common economic, political, and social characteristics that put them at a disadvantage compared to large stable countries and require policy makers to carefully craft regulatory policies to accommodate these advantages.

Fragility is the main threat against stable and competitive market. It (1) drives investors away, (2) inhibits growth to the degree that even if the state is quite large, its domestic market remains small, and thus suffers from high cost of supplying telecommunications services, (3) increases corruption and strengthens political investment cycles, (4) and produces weak and small bureaucracy. Therefore, the problem of efficient regulations goes beyond the technical requirements and expertise a regulatory authority should possess. The political process of initiating telecommunications liberalization should always be analyzed with caution. Positive theories explanation of regulation has gains more validity within fragility.

Small states’ economic and social characteristics suggest that a small state should adapt a regulatory framework to accommodate such characteristics. Small domestic market coupled with limited resources base and structural openness to trade and vulnerability constitute the main economic characteristics of small states, while strong social cohesion and close ties between the political elite are their distinctive social characteristics.

The presence of high economies of scale in fixed networks means that voice telephony is still subject to natural monopoly, while competition is feasible in mobile and data markets. The lack of skilled staff means that the ability of the regulatory authority to produce quality regulations and to mitigate regulatory issues will be limited.

As a newly established jurisdiction, the Palestinian Authority took control over a small and outdated telecommunications network in the West Bank and Gaza Strip. It adopted a classic Post, Telegraph and Telephone Service agency (PTT) model and provided Paltel with exclusive license to provide wired and wireless telecommunications services. Although late, in 2005 policy makers realized that the classic PTT does not work anymore so they opted for liberalization of the market, a process that is still “in progress.”

A first best solution for the Palestinian authority telecommunications market woes is present. Economic integration with Israel shall solve most of the Palestinian Authority’s problems and yield a competitive telecommunications market. The sad reality of the political structures in both the Palestinian Authority and Israel renders such solution inapplicable and unpopular. A second best solution that is based on the current institutional foundations of the Palestinian Authority and would be compatible with its institutions is a simple licensed-based system backed up by international guarantees to ensure that terms and conditions laid out in the license are respected by parties, the government, and the undertaking.

If the Palestinian Authority seeks to implement a more sophisticated regulatory system that establishes an independent regulatory authority and implements best international regulatory practices, it has to upgrade its institutions in order to match such sophisticated regulatory system. In particular, it has to guarantee partial and expert judiciary, introduce mechanisms that prevent government exploitation and political influence over regulatory decisions, and to upgrade its bureaucracy.

Date of Award	19 Jan 2017
Original language	English
Awarding Institution	University of Namur
Sponsors	Académie de Recherche et d'Enseignement supérieur
Supervisor	Alexandre De Streel (Supervisor), ALAIN DE CROMBRUGGHE DE PICQUENDAELE (President), Elisabeth Van Hecke (Jury), Paul Belleflamme (Jury) & Andrea Renda (Jury)