TelecommunicationsTelecommunications

Infrastructure in EAP: The Way Infrastructure in EAP: The Way ForwardForward

Second WorkshopSecond WorkshopBali, 27-29 June 2004Bali, 27-29 June 2004

John UreJohn UreDirector Telecommunications Research Director Telecommunications Research

ProjectProjectUniversity of Hong KongUniversity of Hong Konghttp://www.trp.hku.hkhttp://www.trp.hku.hk

Issues AddressedIssues Addressed The Key Issue?The Key Issue? Investment in telecommunications in EAP – Investment in telecommunications in EAP –

setting the scenesetting the scene Telecom’s utility cost-structure + Telecom’s utility cost-structure +

economies of scopeeconomies of scope Why has telecom succeeded in attracting Why has telecom succeeded in attracting

private investment? Critical success factorsprivate investment? Critical success factors Modes of ownership, investment and growthModes of ownership, investment and growth Lessons from telecom ? - some Questions Lessons from telecom ? - some Questions

and Answersand Answers What role is most effective for the public What role is most effective for the public

sector?sector?

The Key Issue?The Key Issue? Telecom liberalization (strategic Telecom liberalization (strategic

new entry and investment) has new entry and investment) has been very successful – if been very successful – if telecom, why not other utilities?telecom, why not other utilities? Why telecom?Why telecom? What role for public sector in What role for public sector in

telecom? (opposite to question telecom? (opposite to question ‘what role for private sector in ‘what role for private sector in water, power, etc.’)water, power, etc.’)

Introducing the Introducing the

Investment StoryInvestment Story

Fixed line teledensity by per capita GDP

0

2

4

6

8

10

12

14

16

18

20

0 1000 2000 3000 4000 5000

Teledensity

Per Capita GDP

China

Laos

Mongolia

PNG

Philippines

Thailand

Vietnam

Indonesia

Malaysia

Cambodia

Source: EIU, World Bank, Paul Budd, ADBNote: Fixed line teledensity figures for Cambodia, Mongolia and PNG are for 2001

Mobile teledensity by per capita GDP

0

5

10

15

20

25

30

35

40

0 1000 2000 3000 4000 5000

Teledensity

Per Capita GDP

China

Laos

Mongolia

PNG

Philippines

Thailand

Cambodia

Indonesia

Malaysia

Vietnam

Source: EIU, World Bank, Paul Budd, ADBNote: Fixed line teledensity figures for Cambodia, Mongolia and PNG are for 2001

0

2

4

6

8

10

12

14

Financial Closure Year

Num

ber o

f Pro

ject

s

Management andlease contract

Greenfield Project

Divestiture

Concession

Investment by Project Type

Source: World Bank PPI database

0

2

4

6

8

10

12

14

Financial Closure Year

Num

ber o

f Pro

ject

s

Mobile Access

Fixed and Mobile

Fixed Access and LongDistance

Investment by Sector

Source: World Bank PPI database

Telecom Investment in EAP Telecom Investment in EAP

Telecom = for 44% investment going Telecom = for 44% investment going into infrastructure projects in into infrastructure projects in developing countries, 1990-2001 developing countries, 1990-2001 Divestiture = 40% (Divestiture = 40% (partialpartial

privatization)privatization) Greenfield projects > 50% (mostly Greenfield projects > 50% (mostly

mobile and mobile/fixed mix) mobile and mobile/fixed mix) Concessions = 8% (BTOs/BOTs)Concessions = 8% (BTOs/BOTs)

From SOTE to POTE

Initial Investment

Privatization Concessions New LicencesIPOs, Auctions, JVs BTs, BTOs, BOTs Greenfield projects, JVs

Expansion

Equity, Debt, Retained Earnings

Pull Factors

Push Factors

Emerging markets; Growth markets; Global synergies; Servicing MNCs; Experimental

Saturation in home markets; Supporting domestic stock price; Strategic expansion

Levels of Interest by Investors

Privatization Concessions New LicencesHigh Medium Medium Low High Low

Issues of Concern to Investors

Tariff policy Exclusivity ‘New’ new entryUSO Duration InterconnectionUnbundling Transfer of assets > 50% Control

From Entry to Exit

Pull Factors

Push Factors

1997; Regulatory failure*; No chance of 50% ownership

3G debt; Dot.bomb; Threats and opportunities in homemarkets, especially broadband; International alliances fail

• Exit by strategic investors based in larger, especially non-Asian economies• Exit by fund investors from smaller Asian economies - but some are stranded• Staying for more - strategic investors from small developed Asian and Scandinavian economies still invest

* For example, Indonesia replaced 15 year KSO exclusivity with competition between IndoSat vs Telkom and failed to

rebalance tariffs.

Has Investment Sentiment Has Investment Sentiment Changed?Changed?

Pre-1997 - Pull factor (Return on Investment) Pre-1997 - Pull factor (Return on Investment) both necessary both necessary and sufficient and sufficient Investment sentiment (‘Asian economic miracle’) + Investment sentiment (‘Asian economic miracle’) +

opportunity over-rode policy and regulatory opportunity over-rode policy and regulatory weaknessweakness

Post-1997 - Pull and Push factors Post-1997 - Pull and Push factors bothboth necessary but necessary but neither neither sufficient of their ownsufficient of their own Investment sentiment more company focusedInvestment sentiment more company focused Investment in China’s and India’s growth markets Investment in China’s and India’s growth markets

are country focusedare country focused Foreign strategic investors from small saturated Foreign strategic investors from small saturated

markets looking for moderate-to-good RoIsmarkets looking for moderate-to-good RoIs[[Examples: SingTel, Korea Telecom, Millicom, Telenor, CP Group Examples: SingTel, Korea Telecom, Millicom, Telenor, CP Group

(Thailand), Telekom Malaysia and Maxis (Malaysia)](Thailand), Telekom Malaysia and Maxis (Malaysia)]

Introducing the Introducing the Telecom as Telecom as Utility StoryUtility Story

Telecom as Utility + Economies of Telecom as Utility + Economies of ScopeScope

• Telecom is a classic utility – yet economies of scope = heterogeneous products and services = offer multiple revenue streams

• Falling MC and AC – • supply-side: economies of scale and scope• demand-side: network economics (telecom is duplex – unlike other utilities?)

• Why doesn’t incumbent price everyone else out of the market?

•Regulation + diversity of markets and technologies standalone options• Facilities competition - NGNs, cable networks, Vsat, WLL• Services competition – dels (Res & Bus), VPNs, BB, VoIP, etc.

Lowering Barriers Countervailing tendencies Raising Barriers

Technology vs Economics

Falling cost vs Growingof electronic scale ofcomponents network

IP-structured vs Diverse architecture software-drivenwith routers services

NextGenerationNetworks

Economies of scope

Standalone Networks

NetworkEconomics

Contestable vs Externalitiesmarkets (duplex)

Economies of Scale

‘Moore’s Law’

Disruptive New Technologies VoIP Mobile Cellular

Undermine Fixed IDD and NLD revenues, and substitution of mobile cellular for fixedReduce Fixed IDD and NLD cross-subsidy to local loop

“Rebalance” local loop tariff and accelerate mobile:fixed substitution

Note: IDD and NLD price elasticity uncertain. Indosat’s IDD revenue contribution fell from 73% to 27% 2000-1/4 2004; mobile revenue (Satelindo) rose to 55%

Cost Estimates of Network Elements in PhilippinesNetwork Elements Average Costs (ballpark figures)

Mobile Cellular US$50 per subscriberLandline switching and equipment costs US$600 per direct exchange lineLandline transmission and connection costs US$400 per direct exchange lineLandline NGN routing and equipment costs US$200-300 per direct exchange line

Looking Forward

•Wireless Local Loop• 2002 - Telkom (Indonesia) new fixed line local loops fell from $1,000 to $530 per line• 2004 - Telkom $368 per line ; Ratelindo $240 per line

• Vendor competition • Chinese vendors cutting switching costs up to 60%?

Switching and Transmission Costs Compared

Source: Case study

Fixed and MobileFixed and Mobile Cost and Revenue Cost and Revenue CharacteristicsCharacteristics

CostsFixed Mobile75C:25V - 40% sunk 70C:30V - 40% sunkHigh and falling Half* and falling

TariffsRegulated CompetitiveRebalancing Unbalancing RevenuesSteady Falling Rising Steady

* Note: Thailand, TelecomAsia’s fixed network (mid-90s) cost Baht 80 billion - capacity 2.6 million; TA’s Orange mobile network cost Baht 40 billion - capacity 3 million

Critical Success FactorsCritical Success Factors

TechnologyInnovation allowed to influence regulation - by-pass, licensing, etc.

MarketsOpportunities enabled by regulation, encouraged technological innovation

Regulation

Prepared to abandon PTT model - more open markets

Critical Success Factors Form a Virtuous Loop

Markets• Mobile cellular (including pre-paid electronic transfers)• Internet Protocol-enabled networks (including broadband)• Wireless access (WLL, WiFi, WiMax, etc)

Costs• Switching costs down• Transmission costs down• CPE (Handsets, PBX, etc)

Policy & Regulation• Deregulation of CPE and VAS• Competitive and convergence licensing • Cost-based pricing

Technology Effects

Investment• Greater network technology and service options• Lower cost barriers to entry• Firm-specific and first-mover advantages versus commodity markets

Markets• Mobile cellular users overtake fixed users (unforeseen at first)• Diffusion of ICT usage (traffic)• Convergence (networks such as cable TV-telephony and fixed-wireless)

Costs• Cost-based interconnect• Tariff rebalancing• Competitive pricing

Technology• Type approval procedures• Spectrum management• Deregulation of procurement

Policy and Regulatory Effects

Investment• Opportunity through licensing• Policies encourage market growth• Free to choose technologies and market segments

Policy and Regulation• Pro-consumer, pro-competitive policies• Telecom seen as a trade and investment issue• Universal access and ICT promotion-specific policies

Costs• By-pass and arbitrage of traditional tariff structures• Flat-rate, Ramsey and other pricing models• Elasticity and investment

Technology• New technology tested and diffusion accelerated• IP-based and e-technologies• Technology convergence

Market Effects

Investment• High returns on investment • Exit strategies if market is buoyant• Eases access to finance

Access• Faster growth of the private sector increases attraction of commercially incremental service areas (eg, pre-paid mobile cellular services; WLL)• Releases and adds to public sector resources for devoting to access• Public policy can focus on ICT diffusionCosts

• Incrementally efficient• Transparent or revealed through incentive mechanisms• Wholesale/retail competition regulation watchdog required

Revenues• Revenue models uncertain• Commodity level prices will drive convergence to gain traffic• Product and service substitution is likely to grow

Combined Effects

Investment• Incumbent fixed line carriers either (a) as low-cost competitive oligopolies rather than inefficient monopolies, or (b) broadband innovators• Mobile cellular operators likely to consolidate, maybe convergence with fixed, with higher returns for scale and scope (eg. 3G applications) • Investors looking for regional/global synergies and require ownership

Models of OwnershipModels of OwnershipOwnership Market Private Participation

SOTE Closed Concessions (BT,BTO,BOT)

PartialPrivatization

Partially Open Public-Private JVs

Fully Privatized Fully Open Fully owned andoperated

Each of these models can produce high, medium or low growth - examples: China is high growth SOTE open to VAS; Vietnam is medium growth SOTE offering BCCs; Myanmar is low growth SOTE mostly closed. Conclusion – open models (even SOTE models) enjoy higher growth?

Lessons From Telecom? Lessons From Telecom? Some Questions and Answers Some Questions and Answers

QuestionsQuestions Effects of tariff rebalancing?Effects of tariff rebalancing?

Can the provision of universal Can the provision of universal access benefit investors? access benefit investors?

Is the concept of a universal Is the concept of a universal service fund the way to go? service fund the way to go?

Is general taxation the way to Is general taxation the way to go?go?

Why licence telecom?Why licence telecom?

AnswersAnswers Accelerate substitution (mobile for Accelerate substitution (mobile for

fixed) but promotes broadbandfixed) but promotes broadband

It reveals unrealized demand It reveals unrealized demand (private sector provision) and/or (private sector provision) and/or increases calling opportunitiesincreases calling opportunities

If the industry itself benefits, but If the industry itself benefits, but does it risk being plundered?does it risk being plundered?

For social equity or development For social equity or development aims, better but then competes aims, better but then competes more openly with other prioritiesmore openly with other priorities

(a) means of handling scarce (a) means of handling scarce resources and IPRs; (b) cheap, resources and IPRs; (b) cheap, efficient and effective way to offer efficient and effective way to offer consumer protection consumer protection

Lessons from Telecom?Lessons from Telecom?Some Questions and AnswersSome Questions and Answers

Questions Questions Is there a way to lower the cost Is there a way to lower the cost

of licensing?of licensing?

Is there a way to reduce the cost Is there a way to reduce the cost of regulation?of regulation?

How to lower the cost barriers to How to lower the cost barriers to entry in highly innovative entry in highly innovative marketsmarkets

Can other utilities offer Can other utilities offer economies of scope?economies of scope?

AnswersAnswers Class licences and raise common Class licences and raise common

licence conditions to the level of a licence conditions to the level of a Telecom Law (= transition to a Telecom Law (= transition to a Competition Law?)Competition Law?)

Unified regulation that oversees Unified regulation that oversees networked industries? But how networked industries? But how important is industry specific important is industry specific knowledge? Is ICT convergence knowledge? Is ICT convergence regulation the half-way house or regulation the half-way house or something entirely different?something entirely different?

Facilities building or sharing - Facilities building or sharing - does it promote investment?does it promote investment?

Utility networks can carry Utility networks can carry telecom, can offer machine-to-telecom, can offer machine-to-machine services, etcmachine services, etc

Some Conclusions - Some Conclusions - Applicable to Other Networked Utilities?Applicable to Other Networked Utilities?

Utilities subject to technological innovation Utilities subject to technological innovation Policy and regulation must not get locked-in to Policy and regulation must not get locked-in to

unsustainable business models of incumbents in an era of unsustainable business models of incumbents in an era of fast technological innovationfast technological innovation

Raising FDI ceilings will be critical in attracting future Raising FDI ceilings will be critical in attracting future major investments in telecommunication infrastructuremajor investments in telecommunication infrastructure

Industrial cycles create need for M&A and Competition Industrial cycles create need for M&A and Competition Laws to attract investment on a stable basisLaws to attract investment on a stable basis

Universal access can be tackled from several different Universal access can be tackled from several different directions once the Natural Monopoly model is directions once the Natural Monopoly model is abandoned - but marginal cost pricing issues do not abandoned - but marginal cost pricing issues do not disappeardisappear

Competition reduces costs but regulation of quality and Competition reduces costs but regulation of quality and hazard safeguards are IMPORTANT even for investors hazard safeguards are IMPORTANT even for investors Is this best done industry specific or general?Is this best done industry specific or general?

What Role is Most Effective for the Public What Role is Most Effective for the Public SectorSector

Special Projects?Special Projects? Does cost-benefit analysis support the case? Would the Does cost-benefit analysis support the case? Would the

private sector investment? Are there externalities and private sector investment? Are there externalities and public good issues? etc) – examples include China’s 5 and public good issues? etc) – examples include China’s 5 and 10 Year Plans; Malaysia’s National Broadband Plan; Mekong 10 Year Plans; Malaysia’s National Broadband Plan; Mekong region (GMS) backboneregion (GMS) backbone

Local State-sponsored projects - optical fibre rings for Local State-sponsored projects - optical fibre rings for towns and cities (for example, China)towns and cities (for example, China)

Universal access, environment and digital divide Universal access, environment and digital divide issues - the State as sponsor but also as catalystissues - the State as sponsor but also as catalyst

Reallocation of scarce (State) resourcesReallocation of scarce (State) resources Relieves State deficits and adds to tax revenuesRelieves State deficits and adds to tax revenues Frees resources for universal access and ICT diffusionFrees resources for universal access and ICT diffusion Puts radio spectrum to revenue-generating and more Puts radio spectrum to revenue-generating and more

efficient use efficient use