Rent Seeking in the Telecommunications Industry?
See "Secret pact secures head start for AIS"BY Jon Fernquest
|
Here are some of the reactions to news like this that I've heard recently:
1. It happened a long time ago, so let's forget about it.
2. Well, isn't that normal? He is the Prime Minister and also a businessman, isn't he?
3. This is shocking. How can he get away with this sort of conflict of interest.
4. I expected this sort of thing, but the Prime Minister is so powerful that there's nothing we can do about it.
5. He's democratically elected, so the people have effectively given him permission to do this.
6. Democrats would do things like this too if they had the power to, so how is TRT any different?
7. Let's protest.
8. Let's fight it in the courts.
9 It's none of my business.
10. Relax, everyone will forget about it in two weeks.
What is your first reaction when you read news like this?
Can you think of any other possible reactions?
Is there a right reaction or are all reactions equally valid?
Chulalongkorn economics professor Pasuk Phongpaichit has described this sort of mixing business with governance, of the private with the public, as rent-seeking . The best and shortest definition of rent seeking that I've seen is in The Economist's online glossary:
RENT-SEEKING
"Cutting yourself a bigger slice of the cake rather than making the cake bigger. Trying to make more money without producing more for customers. Classic examples of rent-seeking, a phrase coined by an economist, Gordon Tullock, include:
• a protection racket, in which the gang takes a cut from the shopkeeper’s PROFIT;
• a CARTEL of FIRMS agreeing to raise PRICES;
• a UNION demanding higher WAGES without offering any increase in PRODUCTIVITY;
• lobbying the GOVERNMENT for tax, spending or regulatory policies that benefit the lobbyists at the expense of taxpayers or consumers or some other rivals.
Whether legal or illegal, as they do not create any value, rent-seeking activities can impose large costs on an economy."
Let's look closer at the facts
The facts of the case in the article are complicated and the article, perhaps, invites the reader to make some conclusions without making any conclusion itself, so let's try to sketch the argument they are making. Let's go over the article and see if the evidence it presents matches the definition of rent-seeking:
1. Take the headline: "Could explain highly priced Shin Corp sale" and in the article: "with this agreement Temasek basically has an assurance that it will have an advantage in launching 3G over the other operators." These seem to be the important sentences in the article.
2. From economics we know that the value of a company is the net present value (NPV) of future profits.
3. For a telecommunications company, future profits depend on future telecommunications concessions.
4. If company A is guaranteed concessions and other companies cannot obtain them, then company A has a competitive advantage over the other companies.
5. In this case other companies supposedly cannot obtain concessions because problems in the functioning of government regulatory agencies (NTC, NBC) mean that there will be very long delays.
6. There was a secret agreement with the government that guaranteed company A concessions long before everyone else.
7. Only insiders such as Shin Corp, the Prime Minister, and Singapore's Temasek knew about this secret agreement and this insider information allowed them to profit from insider trading on the sale of Shin Corp, while others without insider information ultimately lost (or will lose in the future).
Steps 5 and 6 in this chain of reasoning seem rather weak and raise several questions. What further questions would you ask, if you were investigating this case?
Asking more questions
After you read the article, there are a lot of questions that still remain about Thai Mobile and this supposed secret agreement. Here are the facts. What they mean is not entirely clear:
1. Thai Mobile, "is the only mobile operator to be allocated 3G bandwidth in the 1900-2000 MHz range."
Has it been allocated a significant amount of bandwidth that would be useful to big operators like AIS or DTAC?
2. What does this mean? : "AIS and its business allies would have the first rights to negotiate with Thai Mobile for 3G services."
Does "first rights to negotiate" mean other companies won't get a chance to make bids for the bandwidth?
3. What about: "Thai mobile initiated the roaming agreement with AIS...to minimize its own investment costs and to allow the company to start services as quickly as possible by utilising AIS's existing network structure."
Why do they call it a "roaming agreement" ? Isn't roaming a fairly minor service?
Wouldn't AIS eventually just buy Thai Mobile up along with their concession?
Once Thai Mobile was bought up, would there be any way to reverse the process?
Why was Thai Mobile (which hardly has any customers at all) created in the first place?
2. Thai Mobile could "begin services immediately once the NTC finalised the operating environment" and "once the licence framework becomes law, Thai Mobile would be able to start services."
So NTC is the effectively the regulatory agency for Thai Mobile and the not yet operational NBC the regulatory agency for the other telecommunications companies?
3. Supposedly Thai Mobile can move forward with "technical trials" while other companies without licenses cannot even import equipment for testing.
Is the whole 3G implementation process very far along at all? What does "the move towards 3G could take place sometime this year" mean? What move ?
Conclusion
The article certainly raises more questions than it answers. By the time you get to the end of the article there only seems to be some vague potential for rent seeking in the future. Does this mean the article has no value?
Hardly, this article asks difficult questions that could actually lead to greater transparency. Rent-seeking opportunities occur where there is no transparency. Isn't an article that creates transparency a good thing?
Tommorrow, I'm definitely choose an easier and more transparent article to study though!
Vocabulary (in discussion above)
conflict of interest - when a person's private interests conflict with their public interests, for example a politician is supposed to use their power and information only to benefit the public, but they use it to benefit themselves also (See Wikipedia:Conflict_of_interest)it's none of my business - this is someone else's private business that I should not get involved with or talk about
rent seeking - when someone seeks to "gain through manipulation of the economic environment rather than through trade and the production of added wealth" (See Economist:Rent_seeking and Wikipedia:Rent_seeking)
net present value (NPV) - the value of a stream of payments or income over time (future income is always worth less, because a dollar tommorrow is worth less than a dollar today, the rate of exchange between the two being the interest rate) (See Wikipedia:Net_present_value)
concessions - a special right or privilege given to someone, here the government gives a company the right use telecommunications bandwidth (See Wikipedia:Concessions)
competitive advantage - "something that gives a FIRM (or a person or a country) an edge over its rivals" (See Economist:Competitive_advantage)
government regulatory agencies - the part of the government that makes rules that affect how companies can do business in certain industries like telecommunications, transportation, securities, or banking
insider information - private information that insiders use in insider trading (See below)
insider trading - "using information that is not in the public domain but that will move the price of a share, bond or currency when it is made public. An insider trade takes place when someone with privileged, confidential access to that information trades to take advantage of the fact that prices will move when the news gets out...some economists reckon that insider trading leads to more efficient markets: by transmitting the inside information to the market, it makes the price of, say, a company’s shares more accurate. This may be true, but most financial regulators are willing to sacrifice a degree of accuracy in pricing to ensure that outsiders (the great majority of investors) feel they are being treated fairly" (Source: The Economist's Economics Glossary, See also Wikipedia:Insider_trading)
transparency - (See Economist:Transparency and Wikipedia:Transparency)
Vocabulary (in article)
pact – agreementhead start – start before other competitors (so you have an advantage over them)
joint venture – a company or project that two or more companies have invested in and are working together on (See Wikipedia:Joint_venture)
third-generation services (3G) – mobile phone technology that allows non-voice data (such as downloading information, exchanging email, instant messaging, photos, video) to be transmitted in addition to voice (See Wikipedia:3G)
bandwidth – the quantity of telecommunications information that can be sent, on the internet bandwidth is the amount of information downloaded from a site (for example 800 gigabytes (GB) per month, bandwidth is a scarce resource that has a price (See Wikipedia:Bandwidth)
roaming – when a mobile phone is in a location where its mobile service provider (e.g. DTAC) does not provide coverage (for example, another country or outside of Bangkok) (See Wikipedia:Roaming)
x is the predecessor of y – x came before y, x did the job before y did the job.
airwave frequencies, broadcast frequencies – telecommunications bandwidth
allocated space – given bandwidth to use
telecom licenses – government permission to use bandwidth
remains in limbo – remains incomplete, needs to be finished, but unclear what will happen next
is operational – in use or ready to use
the final arbiter – the person or judge who will settle the dispute and end it and whose judgment everyone must accept
revoke its spectrum allocation – take away the bandwidth that it was given
a level playing field – all competitors face the same rules and regulations, there are no special rules for some special competitors
public consultations – discussions with the public, so that public opinion can influence a decision
