When the deregulation of Jamaica's telecoms market took off in earnest at the start of decade, scores of aggressive entrepreneurs lined up for what they hoped to be a share of a market that was for decades the preserve of a private monopoly.

Now, with millions of dollars down the drain, many of these companies are out of business, blaming a weak regulatory environment and cosiness between the big players and the regulators for their demise.

"Of the 72 ISP licensees only seven are operational and 14 of 17 companies that received international voice providers licences in March 2003 are out of business," said Steve Twomey, CEO of Reliant Enterprise, one of the several companies that terminate international telephone calls in Jamaica by the wholesale purchase of minutes from companies and retail it to their customers.

He is also spokesman for Jamaica Competitive Telecoms Association (JCTA), a group that represents the smaller firms in the industry.

According to Twomey, who headed C&W's mobile phone service at the time when Digicel was entering the market, there have been substantial failures in telecoms deregulation in Jamaica.

"There have been failures in specific parts of the Telecoms Act such as separation of accounts, competitive safeguards, outgoing competition and so on," he said at a press conference three weeks ago.

Among their complaints is that at the time of deregulation, the incumbent monopoly was not broken up, so Cable & Wireless maintained its fixed line and mobile telephone services while continuing to be a long-distance carrier.

The upshot, he claims, is that Cable and Wireless is able to operate both as a wholesaler and retailer in the telecoms market, giving it the ability to wholesale telephone time to competitors at rates that make it difficult for them to easily swipe market share.

Moreover, he argues, regulators have failed to enforce safeguards against uncompetitive pricing.

But deputy director of the Office of Utilities Regulations (OUR) Courtney Jackson, says that the regulatory agency has worked within the ambit of the Telecommunications Act, though he admits there are areas that could be strengthened through parliamentary legislation.

"We (the OUR) do our work according to the prescription of the law but there are lots of outstanding issues as to what the form and structure of the policy, regulatory and the institutional framework for the industry ought to be," Jackson told the Business Observer last week.

"We have identified about seventeen areas of the act that require rules promulgated in parliament and which would be desireable. However, one of the reasons why this has not happened is that the time and expertise required to produce the massive number of rules is just not available at the OUR."

Twomey's position was embraced two weeks ago by Paul Siska, vice-president of Touchpoint Centres International Corporation, the Miami-based company that had a flirtation with the Jamaican market.

In late 2002 Touchpoint spent US$4.25 million to buy NetServe, one of the IT start-ups that had received huge loans from the government's INTEC fund but went belly-up in a major scandal that exposed failure to conduct due diligence by Jamaican officials, and scams by the original NetServe owners.

"Touchpoint Telecom ceased to operate since January of this year," Siska said. "The tariff games played between the regulator and the incumbent was designed to shake out the market and the competition. We took the decision because there wasn't a level playing field and there probably would never be one. Cable and Wireless and the regulator have too close a relationship."

Added Siska: "The regulators kept changing the rules and you end up not making money by losing it. We paid about US$250,000 ($15 million) on the telecom part of the business plus another US$50,000 ($3 million) was used for additional equipment so that calls would terminate properly."

Cable and Wireless insists that the regulator has been particularly tough with the former monopoly, and rejects the claim that it has been too close to the regulator over the years.

In a written response to questions posed by the Business Observer, C&W out its position on the issue:
"The company is indisputably the most regulated telecommunications provider in the island and is constantly under the watchful eyes of the Telecommunications regulator, the competition authority, its competitors and the public," said the firm. "A substantive example of the regulatory restrictions placed on C&W is the fact that the Office of Utilities Regulations as the regulator must approve C&W's rates for interconnection as well as for several retail services."

Minette Palmer, a lawyer and telecom advisor to technology minister, Phillip Paulwell, argues that the companies are looking to the wrong reasons for their failure. It is actually the competitive environment created by the deregulation process that has caused the fallout, she argues.

"A lot of persons came into the sector to trade international minutes only, and many who started in the liberalised environment were entrepreneurs drawn to the market by the high margins," Palmer told the Business Observer. "They came in with expectations of low overheads and high margins but now it is a competitive environment, and as prices moved down the margins disappeared."

According to Palmer, with high competition, those firms that lack the capital to survive on very thin margins would naturally be forced from the market.

"People who didn't have the resources to withstand that kind of assault had to get out," she said. "It used to be expensive to make calls into and out of Jamaica - US$1 per minute at one point. It went down to US$0.025 per minute in less than a decade. That level of competition in a market is bound to drive out some companies."

Termination rate is what is charged by a local network operator to terminate an incoming call on its network. On the other hand, settlement rate is the charge by the local international carrier to the overseas carriers (eg AT&T and Sprint) to convey incoming international minutes into Jamaica.

The settlement rate to the PSTN has fallen dramatically from a high of US$0.625 per minute in 1999/2000 to an American-imposed unilateral reduction to US$0.19 effective January 2001. This reduction arouse out of the Report & Order on International Settlements, issued by the Federal Communications Commission (FCC) of the USA. During the early stages of liberalisation in March 2003, the rate was US$0.14, falling to US$0.017 by September 2004.

The November 2004 approval of the US$0.025 rate in the fifth version of the Reference Interconnection Offer (RIO5) saw an increase in the settlement rates to an average of just under US$0.035 per minute, with the rates from the primary markets of US, Canada and UK being as low as US$0.026.

C&W suggested that it was not surprised by the fallout given the reduction in rates, and the fact that the newer entrants to the market had been piggy-backing on its network.

"Since March 2003 the focus of the newly licensed international carriers has been "piggy-backing" on the C&W PSTN," said the telecoms. "The consequence of the current regime is that the international carriers have been in the business of negotiating settlement rates that are marginally higher than termination rate."

Siska however insists that some firms, including his, could have competed at very low margins but were unwilling to continue operating in an environment fraught with uncertainty.

"The telecoms industry in general has had decreasing margins but if you had certainty in the market [regulations], companies could work with small margins," Siska said.

The OUR's Jackson has another perspective - believing that the industry had reached a point of stability at the beginning of this year, and contends that level at which international settlement rates stabilised had discouraged the smaller operators.

"In stabilising market fluctuations in the settlement rate, one of the problems was in relation to cost-based termination on local networks, which had not been finalised before the conclusion of a cost study," Jackson told the Business Observer.

"During that time," he added, "the OUR attempted to take some interim decisions pending the conclusion of the cost-based rates, which perhaps caused some difficulties in the trade. There has been stabilisation since the last determination in February of this year (2005), but the level at which prices have stabilised seems to be causing problems for the smaller operators."

But Mike Dawson, the acting chief executive officer of People's Telecoms, largely agrees with Siska, although his firm, which uses Jamaican cultural icons to brand its calling card, has managed to remain in operation.

Nonetheless, says Dawson, People's Telecoms has been hurt on several occasions due to sudden regulation changes. The most recent of these, he says, was in June, with the imposition of a cess on international telephone calls termination in Jamaica - US$0.03 per minute to fixed wire and US$0.02 per minute to mobile.

"Since the cess, we had to let people go and reduce our Canadian operations to a skeleton," Dawson told the Business Observer. "So far, the hit we have taken is in the millions. I had to take down all my flyers advertising the rates, maintain our published rates for a period of time and make reductions gradually. So we will sustain a loss until the end of August."

Dawson charges that there were undeclared motives behind the cess, which the government says will be used to finance e-learning in Jamaican schools.

"I think the cess was set up to eliminate discount carriers, those are carriers who maintain low overheads in order to provide low prices," he says. "The cess was agreed by the Big Three and introduced after the fact. If the environment continues in the same vein, the industry will return to a duopoly."

The Big Three to which he referred are Cable & Wireless, Digicel and the third, but smaller mobile phone company, Oceanic Digital (MiPhone).

Leon McCalla, who owned a company called Callworks which is among those that failed, blames the failure on regulation.

"We only sold prepaid calling cards, which we launched around the same time as Centennial (Oceanic Digital Jamaica) actually launched. We finally had to close operations at the end of last year," McCalla told the Business Observer. "The main reason was due to the lack of enforcement of regulations and lack of regulations from the OUR."

McCalla estimates his total investment at US$200,000 (J$12 million), an amount he says he was unable to recover.
David Goldson, a partner in calling card company Knutsford Telecom, estimated his company's loss at close to $10 million. But part of the cause of the fallout, according to Goldson, was the high number of licences issued.

"It was a bad regulatory environment that caused the fall of the local companies, as well as the fact that too many licences were given out," he said. "That is, many licences were given out and there were only so many minutes."
Moreover, more could have been done to accommodate new entrants, Goldson argues.

"The regulators would like to say that we were just 'margin gatherers' but as we in the competitive telecom sector have pointed out on several occasions, the telecom industry is an expensive one to enter," Goldson told the Business Observer. "So a lot of us were using the termination of minutes to generate revenue for investing in other areas of the industry."

C&W has a different perspective. It points out that despite the large number of licensees in the market, the operations on the carrier level have been for the most part confined to the conveyance of international traffic. Its argument is that the lack of investment in physical infrastructure "eroded the objectives of liberalisation".

"The harsh reality is that the small telecoms have eroded the objectives of liberalisation as they effectively resell the services of network operators without contributing to the development of the telecommunications infrastructure in Jamaica," declares C&W.

C&W further charges that claims it was the new market player that "precipitated a decline in the international settlement rates," which according to the former monopoly, triggered a reduction of hard currency inflows to Jamaica.

"As a result of the existing regime, the revenue losses have been significant," says C&W. "For instance when compared to 1998 the national loss of hard currency generated from international settlements to the PSTN in 2004 was in the region of US$144 million per annum. Moreover, for every one cent decline in the settlement rate the country loses over US$300,000 per month of foreign exchange inflows."

Mark Reid, chief operating officer and a principal of Jamaica Network Access Point (JNAP), is among a handful of players in the industry to have broken with the pack over the reasons for the fallout.

Reid's firm focused on interconnectivity and storage services rather than call termination. He believes that firms that focused strictly on call termination and not enough on infrastructure could not survive market forces.

"The industry has been deregulated for two years now and what has happened is that market forces have prevailed on us," Reid told the Business Observer. "The industry will evolve and those that have significant investment in infrastructure will survive. The problem with a lot of the smaller carriers is that they relied only on the termination of traffic."

McCalla, the owner of Callworks, remains adamant that the deregulated environment would have accommodated new entrants if Cable and Wireless had been forced to break itself up into different operating segments, as was done in the United States.

"America and Australia are markets that underwent successful deregulation," McCalla said. "They started with one company and then they broke them up into separate business segments. Once split up, business segments in one area of business could not operate in another."

However Palmer, the government's advisor, insists that such a course of action was not necessary in the Jamaican environment as competitive safeguards were sufficient.

"In the case of the US, the incumbent had to be physically broken up because it became clear that the incumbent would not cooperate in a way that would make competitive safeguards useful," Palmer said. "The model that Jamaica took was not one that would require structural separation because our economy is significantly smaller."

Competitive safeguards are measures put in place to ensure that any part of the incumbent monopoly's operations that sold services in competition with its wholesale customers, would be required to take services from that section of its business on the same terms as it sells to a third party competitor.

"Jamaica is not the only or first country in which a phone company is both a retailer and a wholesaler," Palmer said. "Regulatory systems are put in place to manage the formula that firms use to determine retail or wholesale rates. In Jamaica, the regulatory system fixes the wholesale rates."

According to Palmer, the formula used to determine wholesale rates is the retail price minus the cost avoided by selling at a wholesale level - costs associated with packaging, marketing, distribution channels and so on.

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