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Special considerations regarding the development
of cost models in small countries IIRs Telecoms
Cost Accounting Conference 2009, Dubai 25th
29th October 2009
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• SBR

SBR Juconomy Consulting AG offers sound business,
technical, regulatory and legal advice on
regulated markets in the telecoms sector and
other network industries (post, electricity, gas,
railways), as well as the media and information
technology (ICT) segments Established 1st March
2004 Practices in Düsseldorf and Vienna
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• SBR

Broad international project experience in Europe,
the Middle East, Asia, Africa and the Pacific
Afghanistan, Austria, Bahrain, China, Czech
Republic, France, Germany, Ghana, Greece, Italy,
Kosovo, Madagascar, Namibia, Netherlands, Norway,
Oman, Poland, Romania, Samoa, Saudi Arabia,
Slovenia, Spain, Switzerland, Tunisia, UAE, UK
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• SBRs experiences from cost modelling

• Top-down and bottom-up cost models
• Models for regulators, operators and industry
  organisations
• Cost models provided in e.g. Germany, Austria,
  Afghanistan, Samoa etc.
• Projects on regulatory cost issues in Germany,
  Austria, Bahrain, UAE, Madagascar etc.

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• Content

Introduction
Establishing Cost Models in Small Countries
Doing Cost Assessments in Small Countries
Summary
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• Introduction

Aspects

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• CM are required for both operators and
  regulators.
• Aims of CM are e.g. to set prices (through
  regulator or operator), decide on investments and
  acquisitions.

Cost models (CM)

• Operators and regulators in small countries faces
  some different considerations ? e.g. smaller
  networks, smaller and/or less operators, less
  economies of scale.
• Definition of a small country one with less than
  1-2 Mio. inhabitants.

Small countries
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• Introduction

Modelling decisions to be made are including a
large set of aspects

• Cost of capital (WACC CAPM or current costs)
• Identification of cost drivers
• Identification of CVRs (cost volume relationships)

• Definition of services
• Definition of business units

• Cost Base (LRIC/LRIC/ FAC/Marginal Costs)
• HCA vs. CCA (w/o FL)
• Bottom-up or top-down

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• Special issues regarding CM in small countries

Network design
Economical issues
Issues for regulators

• Low economies of scale
• Limited ressources for economic modelling
• Low transmission costs but high OH costs
• Centralized organisations

• Simple backbone network structures and traffic
  modelling
• Small territory ? No geographical deaveraging
  possible
• More detailled modelling required
• Large proportion of international traffic

• Few and/or small operators ? Challenging
  competition situation
• Less anonymous and more direct communication (?)
• Limited resources

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• Cost modelling in small countries

Situation in small countries
Decisions to be made

• Development of the models
• Top-down vs. Bottom-up
• FAC/FDC vs. LRIC
• HCA vs. CCA
• Definition of services and cost centers
• Designing the network
• Cost assessments
• Operator to be modelled
• Data gathering

• Smaller networks but more detailled modelling
• Small or no backbone / simple backhaul
• Low transmission costs but high proportion of
  OPEX
• Cost constraints on modelling
• Challenging market situation for regulators
• Direct communication

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• Content

Introduction
Establishing Cost Models in Small Countries
Doing Cost Assessments in Small Countries
Summary
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• Cost base FAC/FDC vs. LRIC

The pros and cons of FAC/FDC
Pros

• Implies low costs for the regulator
• Lower requirements on the know-how of the
  regulator
• Low risk of underestimating the costs

Cons

• Information asymmetries in combination with
  principal-agency problems makes it hardly
  possible for the regulator to approve the data
  delivery from the operators
• Difficulties to define and quantify the
  allocation keys

• Difficulties to exclude inefficiencies
• Implies high costs for the operators
• Updates of the cost models implies extensive work
• Intransparent regulation as most data is not
  public

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• Cost base FAC/FDC vs. LRIC

The pros and cons of LRIC
Pros

• Incentives for operators to minimize costs
• Excludes historic developments and sunk costs
• Excludes inefficiencies

• Enables bottom-up modelling ? Less
  principle-agency problems
• Implies low costs for the operators (due to
  limited data gathering)
• Updating the cost models is relatively easy at a
  low cost

Cons

• Requires extensive knowledge for the
  establishment of the cost models in order to
  assess all relevant costs
• Implies high costs for the regulator

• Difficult to assess the incremental cost and to
  exclude inefficiencies in a top-down model
• Risk of underestimating the costs

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• Cost base FAC/FDC vs. LRIC

Characteristics of modelling in small countries FAC/FDC LRIC
Smaller networks but more detailled modelling -
Small or no backbone / simple backhaul
Low transmission costs
High proportion of OPEX --
Cost constraints on modelling -- -
Challenging market situation for regulators /- /-
Direct communication
Small capacities at regulated operators -- -
High setup costs but low costs of operation of
the cost model
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• Top-down vs. Bottom-up and HCA vs. CCA

Decision on top-down vs. Bottom-up as well as HCA
vs. CCA depends inter alia on the decision on FAC
vs. LRIC
FAC/FDC

• Top-down as bottom-up is hardly possible
• Both HCA and CCA are available (Decision should
  depend on the age of the networks, historic
  development and development of equipment prices
  etc.)

• Top-Down or bottom-up decision depends on aspects
  like the support from the operators and their
  accounting departments, certainties about
  inefficiencies and the definition of cost centers
  and services etc.
• Based on the simplier network design in small
  countries, a bottom-up approach is often more
  appropriate for small countries
• LRIC as cost standard is generally to be used
  with CCA

LRIC
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• Building the network within the model

Characteristics of networks in small countries
Implications for the network modelling

• More detailed models required as the law of
  large numbers does not apply.
• Importance to downsize the networks (including
  number of nodes) in order to increase
  utilization.
• Redundancy problems have high impact on costs
• Compression is no large issue

1-3 core sites (switches and MSCs) limited
backbone
Simple star-formed backhaul network
Low traffic volumes
Short distances
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• Modelling must be aligned with available data

Garbage in garbage out

• A cost assessment based on modelling can never be
  better than the quality of the inputs.
• If the model is more detailed than the availbale
  input variables, the outcome has no quality!

1. The cost modelling must be aligned with the
data gathering process 2. Cost models must be
adapted to each country 3. Tailormade cost models
have a higher quality
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• Content

Introduction
Establishing Cost Models in Small Countries
Doing Cost Assessments in Small Countries
Summary
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• Definition of the operator to be modelled

Multiple real operators
One real operator
Hypothetical operator

• The costs are modelled for all regulated
  operators
• Assessment is time consuming as all operators
  must deliver input data
• Benchmarks are less required as multiple input
  are delivered nationally

• The costs are modelled for one operator and
  results are used for all market participants
• Assessment quality and time needed rely on the
  one operator
• Benchmark data can be used to a limited extent

• The cost models are fed with input data for a
  virtual hypothetical operator
• Enables easy use of benchmark data
• Assessment effort is relativ low as only one
  operator is modelled

Decision depends on national conditions, e.g. the
number of operators, legal situation, market
situation, aims of the regulator, age of the
networks etc.
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• General quality aspects of data gathering

Quality aspects
Implications for the network modelling

• Interaction with the operators has a large impact
  on quality.
• National adaptation of cost models required.
• Standardized cost models have the risk of lower
  quality.
• International benchmarking and triangulation in
  the data gathering required.

Garbage in garbage out
Understanding the deliverables
Cross checking of the data
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• Challanges regarding the data gathering in small
  countries

Data Gathering from operators a) Small countries
have few operators ? Heavy dependency on existing
operators and difficulties to assess the quality
of data. b) Distance to operators is limited
enabling intense contact with operators as long
as these are managed nationally c) As operators
and regulator are relatively small, the resources
are limited
International benchmarks Challenge to adjust data
from large countries to small countries ? i.e.for
network equipment, OPEX ratios and other mark-ups
Miscellanious 3rd party resources (consultancy
studies, white papers, ITU sources) mostly done
for large countries
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• Content

Introduction
Establishing Cost Models in Small Countries
Doing Cost Assessments in Small Countries
Summary
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• Summary

Cost modells in small countries

• Small networks and regulators accompanied by
  limited resources
• Required detailled modelling of networks (but
  therefore less modelling of backbone networks)
• Dependancy on a small number of operators to
  deliver input data
• Larger importance of OPEX relative to CAPEX than
  in bigger countries

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• Summary

Expected results from the cost assessment in
small countries

• High proportion of fixed costs due to low volumes
  and less economies of scale ? Traffic sensitive
  models and costs
• Relatively high transmission costs due to low
  economies of scale
• Network quality drives costs to a large extent ?
  The degree of redundancy rapidly leads to low
  utilization
• Relatively high OPEX due to low volumes
• No or low backbone costs

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Contact

SBR JUCONOMY Consulting AG Vienna
Office Düsseldorf Office Parkring
10/1/10 Nordstrasse 116 1010 Vienna 40477
Düsseldorf Austria Germany Tel [phone]
0-0 Tel [phone] Fax 43-1-513
514 0-95 Fax [phone] Lundborg_at_sbr-
net.com