Network industries in Belgium - Economic significance and reform [ Working Paper 01-03 - 31/01/2003]

Network industries are industries whose activity involves conveying people, products or information from one place to the other via some kind of physical network. They include transport networks, information networks and utility networks. Network industries basically consist of three types of activity: upstream activities involving the production of core products such as equipment and means of transport; infrastructure activities involving the construction, maintenance and operation of the physical network; downstream activities involving the delivery of network services to final consumers. Network industries have specific characteristics from an economic point of view. Three of these are particularly notable, the last one also from a social perspective.

The first characteristic is the existence of network externalities. This means that the benefit that a user derives from the network is determined not only by the use of the network as such, but also by the total number of users. Other types of externality may also occur, but these are not specific to network industries. The second characteristic is the possible existence of natural monopolies in the infrastructure network. This means that it is not always efficient to have more than one network, thus placing the single network in a monopoly position. The third characteristic is the delivery of services of public interest. From an economic perspective this relates to the need to convey people, products and information. From a social perspective it relates to the fact that many network services are considered as basic needs to which all citizens have the right of easy and affordable access.

Network industries require a lot of attention during the present period. One important reason for this is the fact that eu policy is focusing on opening the markets in these industries, particularly telecoms, electricity, gas, postal services and railways. For many years most of these industries have been legal or de facto monopolies at the national level and have thus been protected from domestic and foreign competition. One of the basic aims of the eu, however, is the creation of an internal market for goods and services. In order to achieve this aim it is necessary to open up the national markets to international competition. Moreover, the eu has recently set itself a target ‘to become the most competitive and dynamic knowledge-based economy in the world’. This requires the completion of the internal market and, where applicable, market reforms. The latter is needed in particular in the network industries.

Network industries play a crucial role in the economy because the conveyance of persons, products and information is essential for the production of goods and services. Network industries that work efficiently contribute to the efficient functioning of other industries and thus to the competitiveness of the whole economy. It is therefore important for economic policy to create the conditions under which network industries work efficiently. These conditions, however, are strongly influenced by the economic and social characteristics of network industries, particularly natural monopolies and public-interest aspects.

In a natural monopoly, a market without government intervention may behave in such a way that the public interest is not served. Network industries therefore demand special attention from governments. In the past, this has led to the creation of legal or de facto state-controlled (and often state-owned) monopolies that produced both the infrastructure and downstream activities. In the eu context, however, the existence of such monopolies was not compatible with the internal market, which is one of the basic objectives of the Treaty of Rome. They may also hamper the efficient functioning of the network industries. This efficient functioning can be regarded as a way of achieving the objective of the Lisbon strategy to create the most competitive and dynamic economy in the world. Hence from both eu and national perspectives, initiatives have been taken to reform certain network industries.

The reforms are generally focused on the following areas, although there are different emphases in each industry: separation of infrastructure from downstream activities; ensuring equal access for downstream service providers; control of access and interconnection pricing; adequacy of investment programmes; phasing of reforms; safeguarding of the public interest. A market regulator is generally nominated. This market regulator may monitor the market, control and approve prices, grant licences and act as an arbitrator. The regulator plays a crucial role in shaping the conditions to allow a market to function efficiently. At the eu level, one must be aware that more competition at the national level may well be coupled with a higher market concentration at the eu level. Monitoring of possible market power is therefore also an area to which the eu must pay attention.

This paper gives an overview of five Belgian network industries: telecoms, electricity, gas, postal services and railways. As we have seen, market reforms are a current topic in these industries. The aim of this paper is to indicate the economic significance of these industries, describe their structure and relevant legislation, and indicate bottle-necks in the way they work at present.

The five network industries together produced 13.5 billion euro of value added in 2001, which is 5.7% of Belgium's gdp. The industries employed 144,000 persons, which is 4.2% of the Belgian total. Since 1995 value added growth in the network industries has been significantly higher than gdp growth, whereas employment growth has been significantly lower. In absolute terms, net employment creation only amounts to 2,200 jobs in six years. These changes imply a significant increase in productivity, which has especially been the case in telecoms, electricity and gas.

As we have already indicated, the economic significance of these industries is not limited to the sectors themselves but extends to the whole economy. The backward impact refers to the value added created by those activities that supply inputs to the network industries. The forward impact refers to the activities that use the outputs from the network industries. As we have indicated, this includes virtually all economic activities so that network industries are crucial for the economy.

The economic reforms were initiated by the eu through a number of directives that typically prescribed a calendar for the gradual opening up of the markets. In Belgium this calendar is followed strictly in most cases. In some cases it is accelerated. Only in the case of railway passenger services has the eu not yet set a calendar.

One important aspect of the reform is the separation of infrastructure from downstream activities. Given the economic characteristics of these networks (the natural monopoly), this is relevant for electricity, gas and railways. In Belgium, however, the separation is not complete in any of these three industries. In the cases of electricity and gas a legal separation has been decided: separate transport network operators are created, while the creation of distribution network operators is under way. The electricity incumbent, however, still has a significant stake in both network operations and downstream activities, and also in upstream activities (electricity generation). In the case of the railways the separation only involves a separation of accounts.

As regards the phasing, the process of market opening is complete in the case of telecoms. In gas and electricity, about half of the market is now open. In postal services and rail freight, significant steps will be taken in early 2003. As regards the level of competition, significant competition only exists in mobile telecoms and courier services. In the remaining markets that have been opened up (fixed telecoms, electricity, gas and rail freight), the incumbent companies still have dominant or very dominant market positions.

One expected outcome of the market reforms is a positive impact on prices and quality, which determines the impact on users (both industrial and domestic) and on competitiveness. Given the early stage in the opening up of these markets, no evidence of this can be provided, except in the case of telecoms. Based on harmonised price index data from Eurostat, there has in fact been a 15% fall in prices since the opening of this market in 1998. Quality has been improved, for example, through the large-scale digitalisation of the network.

Finally, in each of the network industries there are changes associated with the opening of the market that require specific attention from policy makers. In the case of telecoms, Belgacom, the incumbent, still has a dominant market position. It is indicated by the regulator (bipt/ibpt) as having significant market power, which implies that price control must take place. Furthermore, agreements are made for competitors' access to the networks for interconnection, broadband access and the unbundling of the local loop. The market regulator therefore still has significant work to do in order to avoid monopolistic behaviour.

In the case of electricity and gas the incumbent Electrabel, a private company, also has a very dominant position. It has significant stakes in all segments of both markets, including upstream activities (electricity generation). Furthermore, there is uncertainty about access tariffs for electricity, congested cross-border electricity transport capacity, and many customers are bound to long-term contracts with the incumbent. Government attention is therefore required in order to improve the conditions for the creation of a competitive market.

In the case of the railways there is a separation of accounts, as required by the eu. This does not, however, guarantee independence between infrastructure and downstream activities because the incumbent, nmbs/sncb, has still maintained its unity. An independent body was therefore created to manage network access, but efforts are still needed to secure independence when new train operators enter the market. Another serious obstacle is the lack of interoperability with foreign networks, a problem which must be dealt with at the European level.

In the case of postal services there do not seem to be any significant obstacles at present. In the part of the market that has been opened up, sufficient competition is in place. The incumbent, De Post/La Poste, is modernising its production process. Through management contracts with De Post (and also with Belgacom and nmbs), the State safeguards the public interest by imposing public service obligations, while compensating for the costs involved.