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STU 01-03 : Special Topic - Reform of network industries in Belgium [Short Term Update 01-03]

In the first half of 2002 the world economy seemed to recover from the sharp decline during 2001. This recovery was not, however, confirmed during the second half of the year.

In this muddled international business climate, the recovery of the Belgian economy is postponed until the second half of 2003. In annual average terms, GDP should grow this year by 1.3%. For the first two quarters of this year, positive but very modest GDP growth is assumed. Growth should be higher during the second half of the year, but clearly not as high as seen in previous economic recoveries in 1996 and 1999. Under these circumstances, the employment rate should fall for the second consecutive year, thus scoring 0.6 points lower than its previous peak in 2001. Consumer price inflation should remain rather stable at around 1.4%.

As economic agents are at present spellbound by the growing threat of a war in the Middle East, and the outcome of that conflict situation is hard to predict, the uncertainty margin surrounding the international economic context, is of course extremely high.

Network industries are in the middle of a process of market reform. The essential feature of this reform is the introduction of competition in markets that have, for many years, been monopolies at the national level. Its basic aims are the creation of an EU internal market and an improvement of market performance. One precondition is that network industries must serve the public interest. The purpose of this article is to summarise the current state of affairs concerning the reform of telecommunications, electricity, gas, postal services and railways in Belgium.

Intervention in network industries

Network industries have economic characteristics that are significant in determining the efficient functioning of their markets. The first is the existence of network externalities. This means that the benefit 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. The second is the possible existence of natural monopolies in the infrastructure networks. This means that it is not always efficient to have more than one network, so that the single network comes to be in a monopoly position. The third is the delivery of services in the public interest. Economically, network industries provide essential inputs for virtually all other economic activities. Socially, many network services are considered as basic needs for all citizens.

Efficient network industries contribute towards the efficient functioning of other industries and hence also towards competitiveness. It is therefore important for economic policy to create the conditions under which network industries will work efficiently. These conditions, however, are strongly influenced by the characteristics set out above.

In a natural monopoly, a market may, without intervention, behave in such a way that the public interest is not served. In the past, this has led to the creation of state-controlled monopolies that produced both the infrastructure and downstream activities. In the EU context, however, the existence of such monopolies was no longer compatible with the internal market. Furthermore, thinking in this area had evolved so that it was considered that an opening up of network industries would improve their functioning, which is the aim of the Lisbon strategy. Finally, for some industries, technical progress had reduced the cost of infrastructure and enlarged the number of services on offer. Initiatives have therefore been taken to reform certain network industries.

Economic significance

As we have already mentioned, network industries are important for the economy. The five industries considered here produced 5.7% of Belgium's value added in 2001 and employed 144,000 persons (Tables 1 and 2)(Total value added is closely related but not equal to GDP) . This is their direct economic impact. Since 1995 their value added growth has been higher than the Belgian average, but employment growth has been lower. This implies an increase in productivity, which has been particularly true in the cases of telecommunications, electricity and gas.

The economic significance of these five industries is not limited to them but extends to the whole economy. The backward impact refers to the value added created by activities that supply inputs to the network industries. The forward impact refers to the activities that use the outputs from the network industries, which, in fact, covers virtually every economic activity, including consumer demand.

The state of reforms in Belgium

The economic reforms were initiated by the EU through a number of directives that prescribed a calendar for the gradual opening up of the markets. The reforms mostly include: separation of infrastructure from downstream activities; transparent and nondiscriminatory access to the infrastructure; control of access pricing; adequacy of investment programmes; phasing of reforms; safe-guarding of the public interest; and the appointment of a market regulator.

The telecommunications market was fully opened up for competition in 1998. Entry is allowed into both infrastructure and downstream activities. In September 2002 there were 48 licensees for public network operations in Belgium, 32 for voice telephony and 3 for mobile telephony. Strong competition only exists in the mobile and international calls markets. In the remainder the incumbent (Belgacom) has maintained a dominant position. Its market shares remain large, even though they are on a downward trend. One of the main problems hampering effective competition is the slow opening up of the local loop, which is almost completely controlled by the incumbent. The role of the regulator is therefore crucial, and is mainly focused on controlling conditions for interconnection, broadband access and unbundling of the local loop.

The markets for electricity and gas must, according to EU legislation, be opened up for industrial consumers in 2004 and for all consumers in 2007. This scheme is basically being followed in Belgium, where several administrative levels are involved. The transport networks are an area of federal competence and distribution networks are regional. In one of the regions (Flanders) full market opening will already be achieved this year. At present, the markets are open for large industrial consumers, who collectively represent more than half of the sales volume. In practice only a limited number of customers have switched suppliers, so that the incumbent (Electrabel, a private company) still has a high market share. Legal separations between infrastructure and purchase/sales activities have been decided upon: separate transport network operators are being created, while the creation of distribution network operators is under way. The incumbent, however, still owns significant shares in network operations, as well as electricity generation.

In January 2003, in accordance with EU legislation, the postal market was opened for all items above 100 grams. Until that time the threshold was 350 grams and free entry for express mail was established. This situation led to the rise of about 700 large and small courier services and the entry of some foreign postal incumbents. In 2006 the threshold will be lowered to 50 grams. The large 0-50 grams market segment, however, is still reserved for the incumbent (De Post/La Poste), at least for the time being. Through management contracts with the incumbent, the State safeguards the public interest by imposing public service obligations while compensating for the costs involved.

In the railway industry a significant step will be taken in March 2003 when freight traffic is liberalised on European main lines. Until now only limited third party access had been allowed, leading to the entry of a first competitor in 2002. Full market opening for freight is expected in 2008. For passengers no market opening is foreseen during the next few years. As prescribed by EU legislation there is a separation of the incumbent's (NMBS/SNCB) accounts between infrastructure and train operations. A regulator will be created, who will be in charge of network access management. The public interest is safeguarded by management contracts that impose public service obligations while providing compensation for the costs involved.

STU 01-03 was finalised on February 26th 2003.

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