Telecommunications Infrastructure in EAP: The Way Forward Second Workshop Bali, 27-29 June 2004

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TelecommunicationsInfrastructure in EAP The
Way ForwardSecond WorkshopBali, 27-29 June 2004

• John Ure
• Director Telecommunications Research Project
• University of Hong Kong
• http//www.trp.hku.hk

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Issues Addressed

• The Key Issue?
• Investment in telecommunications in EAP setting
  the scene
• Telecoms utility cost-structure economies of
  scope
• Why has telecom succeeded in attracting private
  investment? Critical success factors
• Modes of ownership, investment and growth
• Lessons from telecom ? - some Questions and
  Answers
• What role is most effective for the public sector?

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The Key Issue?

• Telecom liberalization (strategic new entry and
  investment) has been very successful if
  telecom, why not other utilities?
• Why telecom?
• What role for public sector in telecom? (opposite
  to question what role for private sector in
  water, power, etc.)

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• Introducing the
• Investment Story

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Fixed line teledensity by per capita GDP
Teledensity
Malaysia
China
Thailand
Vietnam
Philippines
Mongolia
Indonesia
Laos
PNG
Cambodia
Per Capita GDP
Source EIU, World Bank, Paul Budd, ADB Note
Fixed line teledensity figures for Cambodia,
Mongolia and PNG are for 2001
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Mobile teledensity by per capita GDP
Teledensity
Malaysia
Thailand
Philippines
China
Mongolia
Indonesia
Cambodia
Vietnam
PNG
Laos
Per Capita GDP
Source EIU, World Bank, Paul Budd, ADB Note
Fixed line teledensity figures for Cambodia,
Mongolia and PNG are for 2001
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Investment by Project Type
Source World Bank PPI database
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Investment by Sector
Source World Bank PPI database
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Telecom Investment in EAP

• Telecom for 44 investment going into
  infrastructure projects in developing countries,
  1990-2001
• Divestiture 40 (partial privatization)
• Greenfield projects gt 50 (mostly mobile and
  mobile/fixed mix)
• Concessions 8 (BTOs/BOTs)

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From SOTE to POTE
Initial Investment
Privatization Concessions New
Licences IPOs, Auctions, JVs BTs, BTOs, BOTs
Greenfield projects, JVs
Expansion
Equity, Debt, Retained Earnings
Pull Factors
Emerging markets Growth markets Global
synergies Servicing MNCs Experimental

Push Factors
Saturation in home markets Supporting domestic
stock price Strategic expansion
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Levels of Interest by Investors
Privatization Concessions New
Licences High Medium Medium
Low High Low
Issues of Concern to Investors
Tariff policy Exclusivity New new
entry USO Duration Interconnection Unbundling
Transfer of assets gt 50 Control
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From Entry to Exit
Pull Factors

3G debt Dot.bomb Threats and opportunities in
home markets, especially broadband International
alliances fail
Push Factors
1997 Regulatory failure No chance of 50
ownership

• 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.

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Has Investment Sentiment Changed?

• Pre-1997 - Pull factor (Return on Investment)
  both necessary and sufficient
• Investment sentiment (Asian economic miracle)
  opportunity over-rode policy and regulatory
  weakness
• Post-1997 - Pull and Push factors both necessary
  but neither sufficient of their own
• Investment sentiment more company focused
• Investment in Chinas and Indias growth markets
  are country focused
• Foreign strategic investors from small saturated
  markets looking for moderate-to-good RoIs
• Examples SingTel, Korea Telecom, Millicom,
  Telenor, CP Group (Thailand), Telekom Malaysia
  and Maxis (Malaysia)

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• Introducing the
• Telecom as
• Utility Story

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Telecom as Utility Economies of Scope

• 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 doesnt 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.

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Lowering Barriers Countervailing tendencies
Raising Barriers Technology
vs Economics
Economies of Scale
Moores Law
Falling cost vs Growing of electronic
scale of components network
Next Generation Networks
Economies of scope
IP-structured vs Diverse architecture
software-driven with routers services
Standalone Networks
Network Economics
Contestable vs Externalities markets
(duplex)
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Disruptive New Technologies VoIP
Mobile Cellular
Undermine Fixed IDD and NLD revenues, and
substitution of mobile cellular for fixed
Reduce Fixed IDD and NLD cross-subsidy to local
loop
Rebalance local loop tariff and accelerate
mobilefixed substitution
Note IDD and NLD price elasticity
uncertain. Indosats IDD revenue contribution
fell from 73 to 27 2000-1/4 2004 mobile
revenue (Satelindo) rose to 55
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Switching and Transmission Costs Compared
Source Case study

• 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?

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Fixed and Mobile Cost and Revenue Characteristics
Costs Fixed
Mobile 75C25V - 40 sunk
70C30V - 40 sunk High and falling
Half and falling
Tariffs Regulated
Competitive Rebalancing Unbalancing
Revenues Steady Falling Rising
Steady
Note Thailand, TelecomAsias fixed network
(mid-90s) cost Baht 80 billion - capacity 2.6
million TAs Orange mobile network cost Baht 40
billion - capacity 3 million
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• Critical Success Factors

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Critical Success Factors Form a Virtuous Loop

Technology Innovation allowed to influence
regulation - by-pass, licensing, etc.
Markets Opportunities enabled by regulation,
encouraged technological innovation
Regulation Prepared to abandon PTT model - more
open markets
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Technology Effects

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

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

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

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

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Policy and Regulatory Effects

• 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)

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

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

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

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Market Effects

• 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

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

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Combined Effects

• 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 diffusion

• Costs
• 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

• 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

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Models of Ownership
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?
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Lessons From Telecom? Some Questions and Answers

• Questions
• Effects of tariff rebalancing?
• Can the provision of universal access benefit
  investors?
• Is the concept of a universal service fund the
  way to go?
• Is general taxation the way to go?
• Why licence telecom?

• Answers
• Accelerate substitution (mobile for fixed) but
  promotes broadband
• It reveals unrealized demand (private sector
  provision) and/or increases calling opportunities
• If the industry itself benefits, but does it risk
  being plundered?
• For social equity or development aims, better but
  then competes more openly with other priorities
• (a) means of handling scarce resources and IPRs
  (b) cheap, efficient and effective way to offer
  consumer protection

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Lessons from Telecom?Some Questions and Answers

• Questions
• Is there a way to lower the cost of licensing?
• Is there a way to reduce the cost of regulation?
• How to lower the cost barriers to entry in highly
  innovative markets
• Can other utilities offer economies of scope?

• Answers
• Class licences and raise common licence
  conditions to the level of a Telecom Law (
  transition to a Competition Law?)
• Unified regulation that oversees networked
  industries? But how important is industry
  specific knowledge? Is ICT convergence regulation
  the half-way house or something entirely
  different?
• Facilities building or sharing - does it promote
  investment?
• Utility networks can carry telecom, can offer
  machine-to-machine services, etc

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Some Conclusions - Applicable to Other Networked
Utilities?

• Utilities subject to technological innovation
• Policy and regulation must not get locked-in to
  unsustainable business models of incumbents in an
  era of fast technological innovation
• Raising FDI ceilings will be critical in
  attracting future major investments in
  telecommunication infrastructure
• Industrial cycles create need for MA and
  Competition Laws to attract investment on a
  stable basis
• Universal access can be tackled from several
  different directions once the Natural Monopoly
  model is abandoned - but marginal cost pricing
  issues do not disappear
• Competition reduces costs but regulation of
  quality and hazard safeguards are IMPORTANT even
  for investors
• Is this best done industry specific or general?

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What Role is Most Effective for the Public Sector

• Special Projects?
• Does cost-benefit analysis support the case?
  Would the private sector investment? Are there
  externalities and public good issues? etc)
  examples include Chinas 5 and 10 Year Plans
  Malaysias National Broadband Plan Mekong region
  (GMS) backbone
• Local State-sponsored projects - optical fibre
  rings for towns and cities (for example, China)
• Universal access, environment and digital divide
  issues - the State as sponsor but also as
  catalyst
• Reallocation of scarce (State) resources
• Relieves State deficits and adds to tax revenues
• Frees resources for universal access and ICT
  diffusion
• Puts radio spectrum to revenue-generating and
  more efficient use