The role of regulation and commitment in the development of telecommunications in Chile

Over six decades, Chile experimented with three regulatory regimes and ownership patterns for its telecommunications sectors, each with radically different investment patterns. Until 1970, Chile relied on private ownership and rate-of-return regulation, but excess demand persisted. In the 1970s, Chile relied on public ownership of two regulated monopolies, but the sector grew even more slowly than before. After 1982, Chile deregulated some market segments, introduced benchmark regulation, and returned to private ownership. The new regulatory regime and privatization doubled the number of lines in service in only four years. The author explains investment behavior as a function of the solutions to two contracting problems: between government and the firm, and between government and interest groups. The author concludes that regulatory rules on pricing, entry, and conflict resolution mechanisms are critical for investing in such asset-specific utilities as telecommunications. More important, the outcome of regulatory reform depends on a match between reform and both the prevailing political and judicial systems and interest group politics. According to the author, Chile satisfactorily resolved the two contracting problems in the 1980's. Chile's new regulations are reasonably efficient and very specific about how tariffs are to be calculated, how entry is to be governed, and how conflicts are to be resolved. The rules are embodied in a law that is relatively difficult to change (because the judicial system is independent). The impetus for reform came from the emergency of a new private entrepreneurial class, whose growth depends on modern telecommunications services.