On the surface, the liberalisation of the Australian telecommunications market has been a great success.

Since the sector was opened to full competition in mid-1997, the number of carriers has increased from three to more than 70 while there are around 140 providers of telephone services and over 650 internet service providers.

As in other countries where deregulation has taken place, individuals pay far less for many services but the market, until last year at least, enjoyed strong growth. The average annual increase in revenues between 1997 and 2000 was 13 per cent, supporting high levels of capital expenditures - A$9bn in the year to mid-2001, for example.

However, Telstra, the partially-privatised former monopoly - it is still 50.1 per cent state owned - is still dominant. Australia's largest company, it accounts for three out of every four dollars spent on telecoms and there are fears that the looming rationalisation of the sector will only reinforce its dominant position.

"There is not the competition that was initially envisaged," says Paul Budde, a leading independent telecoms analyst. He points to the largely unchallenged price increases that Telstra is pushing through which, in many cases, have been matched by Optus, Australia's second largest carrier.

A survey of the sector published by Deloitte at the beginning of this year found "emerging concerns that the Australian market is moving back to the duopoly days with two full service carriers". As it is Australia's telecoms prices, on a relative basis, are amongst the highest in the OECD.

Efforts to increase competition have been hindered by the delays in resolving disputes over access to the core infrastructure and its pricing, a lengthy process that Telstra's critics say it has deliberately exploited.

If agreements cannot be reached, the Australian Competition and Consumer Commission is empowered to arbitrate, but its decisions are subject to appeal and it can take years for cases to be settled.

Another reason why both local telecoms charges and the barriers to entry are relatively high, and one that is harder to solve, is Australia's size. "Prices here have to be higher because of the capital that has to be deployed to build and maintain infrastructure in a country that is so large, but has a small population," says Tim Smart, a telecoms analyst at Macquarie Bank.

This issue has been thrown into sharp relief in the past year with the correction in telecoms stocks and the difficulties companies, especially the smaller less established groups, have had in raising capital to fund new investments. "The two things you need for competition are deregulation and a supply of capital and in the past year there has not been a good supply of capital, far from it," says Stephen Wood, telecoms analyst at Deutsche Bank in Sydney.

Such difficulties have already prompted consolidation and analysts expect more rationalisation in the coming year. The mobile arena, whose strong growth had until recently underpinned the broader sector, is the segment where rationalisation has been most evident. Just a year ago Australia was on the verge of gaining six competing networks - the existing ones operated by the three market leaders Telstra, Optus and Vodafone and those being built or rolled out by Hutchison Telecommunications, the listed local subsidiary of Hutchison Whampoa of Hong Kong; AAPT, Telecom New Zealand's Australian arm; and One.Tel, the ambitious discount telco backed by the Packer and Murdoch families.

In the most spectacular sign of rationalisation yet in the Australian market, One.Tel, which had become the country's fifth largest carrier, went bust while AAPT first cancelled construction of its own mobile network and subsequently joined forces with Hutchison.

Their joint venture has this year agreed a deal to take over most of the base stations that Lucent had built for the aborted One.Tel network. In a sign of the times, it was able to acquire the stations without any upfront payment - it will just take over the lease obligations. The market leaders in mobile - Telstra with 47 per cent, Optus, owned by Singapore Telecommunications, with 33 per cent, and Vodafone with 18 per cent have also been adjusting to the harder times.

All three have announced redundancies with Vodafone not denying reports that it may cut as much as 40 per cent of its workforce.Six years ago Australian mobile phone penetration rates were seventh in the world. They have now dropped to 20th and the number of subscribers is expected to rise only modestly this year from 11.2m last year to around 11.5m, or about 60 per cent of the population.

As a result, revenue growth has started to tail off. After growing from A$2.12bn in 1995 to A$5.5bn by 2000, mobile revenues rose only modestly last year to an estimated A$6.2bn. Revenues per subscriber also remain lower than in many other developed economies. According to GoldmanSachs, Australian mobile phone call charges average about US$90 a month against US$150 a month in Europe. The slower growth means the market is proving insufficient to support a return on the huge corporate investment in mobiles, estimated at about A$50bn since 1996.

In the near term, says Stuart Hartley, vice president for telecoms in Australia at Cap Gemini, operators have cut back high-cost development plans and are focusing on retaining and increasing returns from their existing customer bases.

"You are going to see a lot more 'sweating' of assets to drive immediate revenues," he says. "The best example of this is SMS where growth in Australia is explosive and margins are high." As for broadband, the other potentially strong growth segment of the market, Australia faces some structural issues - broadband penetration for high speed internet is less than 2 per cent of households compared to more than 10 per cent in the US. Cable has failed to take off as it has done elsewhere partly because of the poor uptake in pay-TV - there are just 1.5m subscribers and many of these, especially in rural areas, have access via satellite.

The industry has been held up both because its costs are high - the companies agreed content deals with US producers before the collapse of the Australian dollar in 2000 - and because the government requires almost all major sporting events to be broadcast on the free-to-air channels.

On the infrastructure side, meanwhile, there is a conflict in that Telstra is the largest shareholder in Foxtel, the largest pay-TV company, while Optus owns the third biggest and is in talks to acquire Austar, the second player. The involvement of the two big telcos in the segment has worked against the emergence of a strong competitor bundling both pay-TV and telecoms services via cable.

However, despite the slowdown and structural difficulties in Australian telecoms, there is a feeling that potential for growth is better than in many other developed economies. Mr Budde says that while the first half will be subdued, the sector could return to annualised growth rates above 5 per cent in the second half while Macquarie Bank is predicting a 3.7 per cent increase for the year.