Post on 31-Dec-2015
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