Designing Brazilian Telco's New Regulatory Model

The telecommunications industry in Brazil is in need of a regulatory overhaul.

Brazil's new regulatory model must promote the health of telecommunications companies. To do this, the model must balance economic incentives to enable sustainable investment in Brazil's infrastructure.

Ten principles are essential for designing and implementing a new regulatory framework.

  • Recognize different levels of profitability in the various layers of service. Create symmetry across the layers, by regulating OTTs or deregulating operators, to ensure equal competition. Though the telecom sector generates significant value, this value is distributed very asymmetrically among the main stakeholders.
  • To reduce costs, allow and encourage infrastructure sharing (of antennas, backbone, and spectrum) among operators.
  • Find an alternative to the existing policy of "indirect subsidy," which links the provision of service in economically attractive areas to the supply in areas that are financially undesirable. Alternatively, the regulator should allow operators to act in places they deem attractive, finding ways to increase the appeal of unprofitable areas.
  • Apply varying levels of regulatory intervention to different situations. Determine which criteria will be used to define the appropriate level of intervention. Different service levels, customer sophistication, competitive intensity, and financial return profiles require distinct intervention levels.
  • Change the regulator's role, from industry supervisor (policeman) to capital flow promoter (venture capitalist). This creates economic incentives and properly allocates the sectorial funds. Brazilian telecom operators’ return on capital employed (ROCE) has been falling since 2011 and is now at 4.8%, below the cost of capital. This low return limits the investment capacity of operators, penalizing the whole society.
  • Adjust the aim of regulations. Regulations should focus more on specific objectives—and less on "how" to succeed. If they are given the opportunity to create real value, users will intervene directly. This will eliminate anachronistic service obligations (such as public payphones) and revise the fines and penalties levied on operators.
  • Launch initiatives to encourage adopting the internet (to stimulate infrastructure, improve affordability, and increase digital services in government) as well as upgrading mobile devices (to create demand for operators and reduce costs).
  • Facilitate industry consolidation. This will remove system costs through synergies and eliminate the predatory competitive intensity that compromises the sector's investment capacity.
  • Introduce ex-postregulation versus ex-ante, to allow course corrections and address disruptive emerging trends, which regulators are ill-equipped to anticipate.
  • Consider creating multistakeholder committees to oversee the definition and application of regulations. The aim is to maximize the value generated for society, ensure long-term economic sustainability, and preserve the rule of the development platform.