The Regulatory and Policy Environment Affecting the Services Sector and the Need for Reforms

4.1 Competition and Productivity

Improving the productivity of the services sector is important for enhancing economic growth. To understand the factors that hinder the growth of productivity in this sector, it is important to examine the policy and regulatory environment that affects the sector's growth and development. In most cases, the services sector has been more heavily regulated than manufacturing and this is likely to have reduced competition. As mentioned earlier, subsectors such as electricity, transportation, and telecommunications, which are crucial for competitiveness, have important network externalities. Thus they require regulatory policies that can ensure markets remain contestable.

The growth rebalancing model's focus on the domestic services sector, and this sector's role as another major driver of growth, requires deep structural changes that would shift production towards the services sector and make services more dynamic, competitive, and efficient. To achieve this, increasing competition by removing barriers is crucial.

The empirical literature on the impacts of services liberalization shows that policy reforms that increase competition and improve regulatory oversight lead to improved performance in the industries concerned (Hoekman 2006). Assessing the impact of policy reforms in the telecommunications sectors across 86 developing countries in Africa, Asia, the Middle East, Latin America, and the Caribbean, Fink, Mattoo, and Rathindran (2003) found that privatization and competition led to significant improvements in performance. The authors pointed out that a reform program supported by an independent regulator produced the largest gains, an 8% higher level of mainlines, and a 21% higher level of labor productivity when compared to years of partial or no reform.

4.2 Barriers to Services

Unlike goods, services, which are generally intangible, do not have tariffs. Instead, service industries are characterized by government-imposed restrictions such as the regulation of both market access and the nature and scope of operations of service providers. Considerations relating to consumer protection, high fixed (sunk) costs (increasing returns to scale), prudential supervision, and regulatory oversight, often induce governments to put in place measures that regulate the cross-border trade in services, require domestic establishment by foreign providers in certain service sectors, or reserve activities for government-owned or controlled entities (Hoekman 2006).

In general, barriers to trade in services are classified in terms of whether they restrict market access in general (e.g., a policy that limits the number of service providers) or specifically affect foreign services suppliers by refusing them national treatment (e.g., a policy that limits foreign equity ownership). Regulatory restrictions can reduce competition and efficiency in the services sector. Entry barriers reduce competition and allow incumbent firms to engage in rent-seeking behavior. The maritime industry, for instance, continues to be characterized by imperfect competition as manifest in exemptions from antitrust laws for liner conferences, cargo reservation schemes, restrictions on the foreign ownership of ports, and bans on foreign participation in cabotage. Assessing the implications of imperfect competition in international shipping for the gains from trade in goods, Francois and Wooton (2006) concluded that, at the extreme, monopolization of trade routes can result in up to half the gains from trade liberalization being lost, as shippers take advantage of their increased market power to increase prices. Analyzing the impact of maritime liner arrangements and restrictive practices on transport prices for goods shipped to the US from developing countries, Fink, Mattoo, and Neagu (2005) concluded that private anticompetitive practices appear to have a larger impact on prices than government policies restricting foreign competition, although the latter are also statistically significant determinants of prices.

Other types of restrictions prevent firms from operating efficiently and push up business costs. Looking at the impact of government restrictions in the distribution sector across 18 Organisation for Economic Co-operation and Development (OECD) countries, Kalirajan (2000) concluded that policies regulating operating conditions (employment, operating sizes, etc.) generate inefficiencies that lead to increases in real resource costs for business. Kalirajan's results showed estimated cost increases of up to 8%.

4.2.1 Services Restrictions in the Nontradable Subsectors: Wholesale and Retail, Transport, Communication, Health, and Education

Currently, ASEAN aims to create a single market for services. Since 1997, ASEAN has emphasized the need to liberalize services trade through the adoption of the ASEAN Framework on Trade in Services (AFAS). Under AFAS, some progress has been achieved in the liberalization of financial services and air transport services (Kumar 2008), at least based on the countries' written commitments vis-à-vis their commitments under the General Agreement on Trade in Services (GATS). Many studies, however, have concluded that the AFAS is not particularly liberalizing when compared with GATS commitments, and is not providing much impetus for the liberalization of trade in services within ASEAN (Corbett 2008) because the written commitments for services liberalization are for areas that are already de facto open and liberalized. In other words, the actual situation is merely being ‘codified' through the written commitments, but, in most cases, ASEAN countries have remained protective of their services sectors. Moreover, it is difficult to track what has actually been achieved in terms of liberalization within the countries as data is not readily available and it is difficult to compare implementation against commitments (Australia-Japan Research Centre 2008). Still, we posit that the AFAS and the ASEAN Free Trade Area (AFTA) have slowly shifted mindsets in the private sector toward the goal of providing services to the region rather than merely being focused on domestic markets.

The most recent ASEAN Economic Community Blueprint calls for the substantial removal of restrictions on trade in services for air travel, e-ASEAN, healthcare, and tourism by 2010, in logistics by 2013, and in all other services sectors by 2015. Although the ASEAN countries have pursued unilateral reforms such as privatization, deregulation, and liberalization in their services sectors, empirical studies show that entry barriers continue to remain significant.

4.2.1.1 Wholesale and Retail Trade

In the wholesale and retail trade sector, restrictions are normally imposed through government regulation and can apply either to both domestic and foreign distributors or only to the latter. These restrictions can include zoning restrictions, licensing requirements, limits on store sizes and opening hours, and investment hurdles. There are also “private sector practices,” such as strong buyer-supplier networks in industry, which may act as barriers to competition. Based on government restrictions on trade in distribution services, Kalirajan (2000) calculated trade restrictiveness indices for distribution sectors and found Indonesia, Malaysia, the Philippines, and Thailand to be among the most restrictive economies. These restrictive economies were characterized by stringent establishment regulations, such as restrictions relating to the acquisition of commercial land, foreign direct investment, and large-scale stores. Competition issues also emerged, for instance in Indonesia the Commission for Supervision of Business Competition (KPPU) announced that it would investigate allegations of monopolistic practices by the local arm of French retail giant Carrefour SA.⁷ Following the methodology of Kalirajan, the Australia-Japan Research Centre (2008) found Malaysia to be the most restrictive economy, followed by Thailand and Indonesia. Table 9 [ PDF 29.2KB | 2 pages ] summarizes the regulations and restrictions put in place by ASEAN governments that affect the establishment and operations of firms in the wholesale and retail trade subsector.

4.2.1.2 Maritime Transport and Port Services

Restrictions in maritime services are typically imposed by governments through regulation or legislation. Restrictions are often found in shipping and/or ports and affect both domestic and foreign firms. In the ASEAN and East Asian region, the New Zealand Institute of Economic Research (NZIER) 2008 study identified restrictions in the form of: requirements demanding a commercial presence in domestic markets; foreign equity limits; prohibitions regarding cabotage (coastal shipping) services; the mandatory use of port services such as towing and pilotage; limitations on the right to fly and operate under national flags; and requirements that only national vessels be used to transport non-commercial cargo.

The Philippines and Thailand impose foreign equity limits on shipping and onshore services while Malaysia and Indonesia require foreign maritime service suppliers to have a domestic commercial presence in the form of a joint venture. Moreover, in Malaysia the transportation of non-commercial cargo must be carried out by government-approved vessels and in Indonesia non-commercial cargo must be transported by the government-owned shipping service.

Hollweg and Wong (2009) pointed out that Viet Nam maintains high restrictions on its maritime services sector. Port services are provided exclusively by domestic enterprises and this leads to a highly discriminatory environment. Viet Nam does not allow direct sailing of foreign flags (foreign flags can only sail to gateway ports). Viet Nam is also one of the few countries that practices cargo reservation, together with Indonesia, Malaysia, and the Philippines. The same study also showed the monopolistic structure of public ports in the Philippines, which are controlled by the Philippine Ports Authority (PPA). The PPA acts as both landlord and regulator. It leases selected berths and storage facilities to private operators and grants cargo-handling licenses to stevedoring companies that operate on common-user facilities. Cargo handling is also monopolized under a Philippine policy which limits the number of cargo handlers to a maximum of two in any port, except for Manila's.

To measure the level of restrictiveness placed on suppliers of maritime services, the NZIER study calculated domestic and foreign restrictiveness indices. The domestic index measures all restrictions placed on suppliers of maritime services, regardless of whether they are domestic or foreign suppliers. The foreign index measures all the restrictions placed on foreign firms. The results indicated that the Philippines, Indonesia, and Thailand are the most restrictive countries in ASEAN. Malaysia is highly restrictive on both foreign and domestic firms, while Singapore is the least restrictive. In terms of the specific types of restrictions that contribute most to the foreign indices, the study indicated the following restrictions: conditions on the right to fly the national flag, requirements for commercial presence, restrictions on cabotage, and the requirement to use national vessels for the transportation of non-commercial cargo.

An earlier study by McGuire, Schuele, and Smith (2000) calculated restrictiveness indices for 35 countries (including the ASEAN countries). This study found that among the ASEAN+6⁸ countries, the Philippines and Thailand had the highest foreign restrictiveness indices (along with India and the Republic of Korea [hereafter Korea]), while Singapore had the lowest (along with Australia and New Zealand). It also indicated that for the ASEAN+6 countries, the restrictions on ongoing operations make up on average 60% of the foreign index, including restrictions on both cabotage and the transportation of non-commercial cargo. The right to fly the national flag makes up on average 20% of the foreign index for the ASEAN+6 countries.

4.2.1.3 Postal and Courier Services

Restrictions in the postal services sector relate mainly to the monopoly position of the state. The rationale behind putting postal services under state control is to ensure universal provision at low cost to consumers, which may involve cross-subsidization between profitable and unprofitable market segments. Few countries have fully ended monopoly rights for the supply of public postal services (NZIER 2008). The NZIER study indicated that monopoly rights have been removed only in Singapore, Japan, and New Zealand. In the case of Singapore, Singapore Post holds a license to provide postal services, including local and international letter and postcard collection and delivery services, for 25 years from 1992 to 2017. This license was exclusive until March 2007. Currently there are two types of postal licenses: (i) postal services operators designated as Public Postal Licensees with universal service obligations and (ii) all other postal services operators irrespective of their services scope. Any domestic or foreign provider can enter the market but there have been no new entrants to the market thus far.

State-owned monopolies are still in place in Brunei Darussalam, Cambodia, Indonesia, the Lao PDR, Myanmar, the Philippines, Thailand, and Viet Nam. In Malaysia, an exclusive license has been given to the government monopoly, Pos Malaysia Berhad. With regard to courier (parcel delivery or expedited mail) services, domestic restrictions include zoning restrictions, interconnection restrictions, and establishment restrictions, while foreign restrictions include quotas and licensing fees. Indonesia, the Lao PDR, Singapore, and Thailand require licensing. Common restrictions to foreign entry include foreign investment and ownership regulations and capital requirements.

4.2.1.4 Health Services

Health services include the provision of medical services inside a hospital or laboratory setting.⁹ Arunanondchai and Fink (2007) surveyed policy barriers affecting private investment in health services in seven ASEAN countries. These barriers include mostly foreign equity limitations, economic needs tests, and various performance requirements (Table 10 [ PDF 25.9KB | 1 page ]).

4.2.1.5 Telecommunications

Although the telecommunications sector has been substantially liberalized in most ASEAN countries, resulting in greater competition, discriminatory restrictions still remain (Table 11 [ PDF 33.1KB | 2 pages ]). In Malaysia, foreign equity restrictions tend to benefit the dominant provider, government-controlled Telekom Malaysia, and hamper the development of a more efficient information infrastructure. In the Philippines, foreign firms are reluctant to invest in more capital-intensive applications such as broadband without majority control. In Thailand, competition and regulation issues, such as the phasing out of the "concession" system, the privatization of the state-owned Telephone Organization of Thailand (TOT) and CAT Telecom, and the enforcement of interconnection obligations vis-à-vis these two operators, are still to be resolved. Although the National Telecommunications Commission has made progress in licensing new operators in some subsectors (e.g., internet access and private networks), it has yet to authorize full-fledged competition to the fixed domestic and international voice and data services offered by TOT and CAT Telecom.

4.2.1.6 Education

Overall, countries aim to achieve efficient education services. With rapid changes in technology and communication, the process of internationalization of higher education has been accelerated. The Philippines, Malaysia, Singapore, and Indonesia are fast emerging as exporters of education services in the region (Raychaudhuri and De 2007). Prestigious foreign universities have set up branches in Malaysia. Twinning programs and franchising arrangements with foreign universities from the UK, US, and Australia are also taking place in Singapore, Malaysia, Thailand, and to some extent even in Indonesia and the Philippines.

While opening up the education services market is necessary to reduce costs, improve the quality of education, and provide gains in terms of innovation and greater student access, challenges continue to confront countries. Dessus (2001) pointed out that differences in quality can be attributed to differences in educational infrastructure, initial endowment of human capital, and the ability to distribute services. The author argued that keeping expenditures at existing levels and giving priority to primary education would be more beneficial than giving secondary education to a select few.

Mutual recognition of education services is still limited and there exist considerable differences in terms of standards and content of educational services within the region. Due to differences in educational systems, language, and culture, most countries have been wary of opening up their education services subsectors. Barriers to service provision persist at the primary, secondary, and tertiary levels. These barriers include the non-recognition of degrees and qualifications by governments and/or private sectors, restrictions on commercial presence and/or investment, restrictions on the import of electronically produced educational material and the electronic transmission of course material, non-recognition of courses completed through distance education, quality assurance and accreditation problems with some education institutions who claim to be partnering with foreign institutions, differing visa requirements and employment regulations across countries, competition between public and private providers, and perceived potential threats to cultural values and national traditions. Table 12 [ PDF 22.3KB | 1 page ] provides a list of some barriers to higher education service provision in Southeast Asia.

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