Brazilian experience
on cost modeling
project
ITU/BDT Regional Seminar
Mexico D.F.
19-22 March 2013
March 20th, 2013
Copyright 2012, Todos os direitos reservados. Nenhuma parte deste documento pode ser
reproduzida, independente do meio, sem permissão escrita dos detentores de seus direitos autorais.
0
AGENDA
1
Introduction
2
Cost modeling project – top down models
3
Cost modeling project – bottom up model
4
Main lessons learned
1
MAIN MOTIVATIONS FOR THE COST MODELING PROJECT
What is a cost
model?
What is the use
of it?
What are the
impacts of the cost
model in the
telecom sector?
Source: Advisia
•
Economic regulation
•
Competition
•
Settlement of disputes
•
Frequencies’ bids
•
Continuity
•
Universalization
•
Regulatory framework review
2
BACKGROUND AND MAIN MILESTONES
1990
Source: Advisia
2000
2010
1995: Constitutional
amendment
2003: New PGMU
1997: LGT - Lei Geral de
Telecomunicações
2003: Telecom Public
Policy (Regulation
4733/2003)
1998: Privatization
2005: RSAC (Accounting
Separation)
1998: PGMU – Universal
Services
2008: PGR – Plano Geral
de Atualização da
Regulamentação
2011: Cost
modeling project
3
DEVELOPMENT OF TELECOMUNICATIONS IN BRAZIL
Fixed lines
Mobile lines
(Million)
(Million)
203 245
40
42
43
31
10
86
13
23
0
1990 1995
1990 1995 2000 2005 2010 2012
Penetration
(# fixed lines/
100 households)
29
34
68
75
73
74
1
Penetration
(# mobile lines/
100 inhabitants)
0
01
2000 2005
14
47
2010 2012
106
125
Brazilian telecom regulation fomented a strong increase in number of lines and
penetration – cost modeling should improve market conditions and enhance competition
Source: Advisia, Anatel, Teleco
4
CONCEPTUAL
COST MODELING METHODOLOGIES
Bottom-up
Top-down
Methodology
Methodology
Accounting data
Unit costs
Allocation
Operating costs / Capex
Network elements
Allocation
Unit costs
Efficient operator modeling
Main types of models
Main types of models
• FAC(1) HCA(2)
• FAC CCA(3)
• LRIC(4)
• LRIC(4)
• FAC(1)
(1) Fully allocated cost
(2) Historical cost accounting
(3) Current cost accounting
(4) Long run incremental cost
Source: Advisia
5
PROJECT SCOPE – PHASES
Elements
Contracting structure
•
All work fronts:
‒ Top-Down FAC-HCA
‒ Top-Down FAC-CCA
‒ Top-Down LRIC
‒ Bottom-Up
‒ Methodology
Granted:
‒ STFC (fixed) operators
‒ SMP (mobile) operators
‒ Operators with Significant
‒ Market Power in Leased
Lines
Planning
Phase II
Operators´ data
Phase III
FAC-HCA
Top-down
•
Preparation
Phase I
Phase IV
FAC-CCA
IT solution –
Activity based
costing
management
Phase V
LRIC
Phase VI
•
Activity-based-costing system
( MyABCM).
Bottom-up
Phase VII
Tariffs
6
PROJECT SCOPE – ECONOMIC GROUPS WITH SIGNIFICANT MARKET POWER
GROUPS
COMPOSITION (Resolução nº 101)
1
Telefônica (STFC); Vivo (SMP); Emergia (SCM), DTHi (DTH) …
2
Telemar Norte Leste (STFC); TNL PCS (SMP); Brasil Telecom
(STFC); 14 BrT Celular (SMP); BrT Com Multimídia (SCM), Vant
(SCM)...
3
Embratel (STFC); Claro (SMP); Vésper (STFC);
4
CTBC Telecom (STFC); CTBC Multimídia (SCM); Engeredes…
5
Sercomtel (STFC); Sercomtel Celular (SMP) ...
6
TIM Nordeste (SMP); TIM Celular (SMP), TIM (STFC)…
7
AGENDA
1
Introduction
2
Cost modeling project – top down models
3
Cost modeling project – bottom up model
4
Main lessons learned
8
INTERNATIONAL CONSORTIUM PROFILE
Consortium
Management consulting
Contracting partners
• Advisia is a strategy consulting
firm focused on supporting leading
companies in identifying opportunities
and solving complex problems
• 500 professionals in 14 offices with
the OC&C partnership
Source: Advisia
International specialists
• Analysys Mason is a consulting firm
specialized in telecom, technology
and media
• With nearly 250 professionals in 11
offices, has supported several clients
including national regulatory agencies
in 100+ countries for 25 years
Independent accountants
IT specialists
• Grant Thornton offers an extensive
range of services including audit, tax,
labor and corporate consulting,
corporate finance and outsourcing to
private and public companies
headquartered in Brazil and
worldwide
• ETEG develops customer demanded
systems in several sectors
• Throughout 11 years of operation,
has become a reference in software
development, and is one of the fastest
growing SMEs according to Exame
9
PROJECT PHASES AND MAIN PRODUCTS
Main products
II
Operators´data processing and
validation
III
FAC-HCA
Top-down modeling
P-II.1
P-II.2
P-II.3
P-II.4
P-III.1
P-III.2
P-III.3
IV
FAC-CCA
Top-down modeling
I
Planning
P-IV.1
P-IV.2
P-IV.3 V
LRIC
Top-down modeling
P-I.1
VII
P-V.1
P-V.2
P-V.3
Tariffs
VI
Bottom up modeling
P-VI.1
Source: Advisia
P-VI.2
P-VI.3
P-VI.4
P-VII.1 P-VII.2
P-VI.5
P-VI.6
P-VI.7
P-VI.8
10
CONCEPTUAL
COMPARATIVE VIEW AMONG FAC-HCA, FAC-CCA AND LRIC
Characteristics
FAC-HCA
FAC-CCA
LRIC
Fully Allocated Costs
Historical Cost Accounting
Fully Allocated Costs
Current Cost Accounting
Long Run
Incremental Costs
• Accounting costs
allocated to products
• Based on historical
costs
• Transforms historical
• Considers long run
costs into current costs
incremental costs
allocated to products
• May consider
eliminating
inefficiencies and
replacing obsolete
technologies
• Tries to reflect
economies of scale and
scope - array of costvolume relationship
Time horizon
Past
(backward looking)
Present
Future
(forward looking)
Assets
evaluation
Historical book
value
Current value
Current / future
replacement value
Network equip. /
Topology
Existing
Existing and
modern equivalent
New and modern
equivalent
Efficiency
adjustments
Not
Possible
Yes
Source: RTR, ITU, Advisia
The 3 models
are
hierarchical,
complementary
and
evolutionary
11
TOTAL COST CALCULATION INCORPORATES OPERATIONAL EXPENSES AND COST OF
CAPITAL
Market weighted average
Operational
expenses
68%
Cost of capital
+
Capital
employed
91%
96%
Operational
cost
20%
Cost of
capital
17%
32%
x
WACC
Total
cost
80%
9%
4%
Min
13%
Max
Mobile operators
Min
Max
Fixed operators
FAC-HCA total cost calculation considers, in addition to operational costs,
also the capital employed for the telecommunication business
Source: Advisia
12
ILUSTRATIVE
OVERVIEW OF ABC-COSTING METHODOLOGY
Activities –
Cost centers
Resources
(Anatel standard)
Drivers
Income
Cost
objects
Drivers
Primary plant
(groups of
elements)
Costs
Support
plant
Assets
Support
functions
Network elements
Products
Liabilities
Source: Advisia
Common
costs
13
TOP-DOWN FAC-HCA MAIN ALLOCATION STEPS
Operational
income
Operational costs
Employed capital
Step 1
Primary Plant
Support Plant
Support
Functions
Step 2
Primary Plant
Support Plant
Common Costs
Step 3
Primary Plant
Step 4
Network
elements
Step 5
Network
elements
Step 6
Products
Step 7
Source: Resolution 396, Advisia
14
MAIN RSAC TABLES COVER ALL SEVEN COST ALLOCATION STEPS
A
Operational
income
Operational costs
Initial
resources
table
Employed capital
B
Step 1
C
Cost centers
tables
Primary Plant
Drivers table
Support Plant
Support
Functions
Step 2
Primary Plant
Support Plant
Common Costs
Step 3
Primary Plant
Step 4
Network
elements
Network
elements
table
D
Step 5
Network
elements
Step 6
Products
list
Products
E
Source: Resolution 396/2005 Anatel, Advisia
Step 7
15
THE FIVE MAIN TABLES FROM RSAC INCORPORATES OVER A THOUSAND ITENS
Descrição
Number of items
Variation among
operators
• Standard chart of accounts for assets, liabilities,
income and expenses, to be used as a starting
point for allocations
• Aprox. 1000
• Low
• Table with drivers recommended to be used at
each stage of allocation
• Aprox. 100
• High
• Structure of the items that compounds the
intermediate allocations cost centers: Primary
plant, support plant and support functions
• Aprox. 100
• Medium
Network
elements
• Table with the main elements that compounds the
network (fixed or mobile), from which the costs are
allocated to products in stage 6
• Aprox. 100
• Low
• Aprox. 300
• High
Products
• List of products, divided by business area, for
which costs are calculated
A
PGSAC
B
Table of
drivers
C
Cost centers
D
E
Source: Advisia
16
MAIN IMPLEMENTATION CHALLENGES: FAC-HCA
Outcome
Approach
Main
Challenges
Assessment of models from
previous years
Variation in the levels of detail
between operators
• Separation of analysis in
comparable modules and groups
between operators
• Ex: Network elem. – Switching,
Transmition and Access
• Profound analysis, with
identification of attention points
by module / group
Source: Advisia
Review of the
methodology and main
RSAC tables
Development of standard
models
Standardization of
RSAC tables
Complementary data gathering
from operators
• Search for alignment with
guiding principles from RSAC
and regulatory demands from
agency
• Collaborative approach, open
for contributions about the
process and proposed revisions
• Achievement of tables attending
either the reality of the
operators and the necessities
of the agency
• Good quality level in the delivery
of information and essential
contributions for the revision of
RSAC
17
STANDARD CCA MODEL LEVERAGES THE SAME DEFINITIONS OF THE STANDARD HCA
MODEL
PGSAC HCA
Output of
CCA model
PGSAC CCA
Assets
Liabilities
Updated assets
Assets
CCA Model
HCA standard
model
Costs
Gross value + accumulated
depretiation
Updated costs
Operators´data
Updated costs
Source: Advisia
CCA results per
product
Income
CCA value of
permanent assets
Costs
Liabilities
Income
18
MAIN CCA CHANGES REFER TO ASSETS AND COSTS BASE
•
HCA
Permanent
Assets Base
HCA Cost Base
Price updates
•
Idleness exclusion
•
Operational costs impacts
•
Annual depreciation adjustments
CCA
Permanent
Assets Base
CCA Cost Base
HCA changes to CCA base is basically updating the historical values ​for current prices, in order
to get closer to the actual cost of an entrant, keeping the existing structure
Source: Advisia
19
MAIN IMPLEMENTATION CHALLENGES: FAC-CCA
Development of standard
models
Standardization of files and
detailing of the assumptions
Adaptation to the changes in
regard to the FAC-HCA
Utilization of different technical
criteria for asset classification and
valuation
• Discussion with technical
specialists and identification of
common classification practices
and trends in other countries
• Translation of the RSAC into
applicable equations in an
integrated model
• Constant alignment between
the project phases and
communication to operators
• Classification standards
identification and trend
forecasts for discussion
• Proposition of a detailed and
standardized delivery model,
reducing the complexity for the
next years
• Possibility of utilization of the
same structure of the HCA
models, with little adjustments
Outcome
Main
Challenges
Review of the RSAC
methodology and main
elements
Approach
Comparable models
analysis
The FAC-CCA challenges are mainly due to criteria standardization, definitions
and formats
Source: Advisia
20
LRIC FIRST STEP IS COST AND ASSETS GROUPS DEFINITION ACCORDING TO COMMON
DRIVERS
CCA assets and
costs bases
Group 1
Driver a
Group 2
Driver b
Group 3
Driver c
(...)
(...)
Group n
Driver x
Cost-Volume curves
(CVRs)
Cost and assets grouping with the same allocation
cost drivers
(lower complexity compared to FAC)
LRIC cost allocation methodology is distinct from HCA and CCA FAC, using own
drivers and specific relationships of cost-volume
Source: Advisia
21
THE SECOND STEP IS THE BUILD UP OF CRV (COST-VOLUME RELATIONSHIPS) CURVES
CVRs examples
Cost-volume relationship
Cost/asset
groups
Asset cost
(CVR – Cost Volume Relationship)
Marginal
increment
Product increment
Drivers
Equipment
installation in
clients
X
Number of
installation
services
Commutation
X
Number of
terminals
Public phone
X
Inhabitants
Support
structures
X
Number of
antennas
DSLAM
X
Number of
access
Driver volume
CVRs are built up using statistical methods, field research or simulations, and identify the cost
specific impact of a product increment increase
Source: Advisia
22
DIFFERENCES IN GRANULARITY AND CRV AMONG OPERATORS PRESENT AN ADDITIONAL
CHALLENGE FOR THE STANDARD MODEL DEFINITION
Number of CVRs
per operator
Number of CVRs
hierarchy
• Great variability in the
implementation of the LRIC
models among operators
94
7
• Number of CVRs and
hierarchy levels indicate
granularity dispersion
among models
• This great variability
difficults direct comparison
among LRIC results – need
of standardization
1
9
Min
Source: Advisia
Max
Min
Max
23
MAIN IMPLEMENTATION CHALLENGES: LRIC
Proposed
approach
Main
Challenges
Comparable models
analysis
Review of the RSAC
methodology and main
elements
Development of standard
models
• Comparison of results of
curves and increments
• Need of additional
information to the RSAC
• Clear definition of product
increment
• Analysis of comparable
CVRs
• Alignment with CCA
standard model
• Proposition of future
evolutionary standardization
• Grouping of similar curves
and products among
operators
• Request in advance of data
request for the operators
• Arrangement of discussions
and meetings with operators
to discuss best practices
• Understanding of CVR curves
development criteria
• Continuity of discussions with
operators with regard to CCA
standard model
• Discussions with operators
for criteria and definitions
alignment
The challenges expected for LRIC implementation are related to the comparability
of results created by different CVRs
Source: Advisia
24
AGENDA
1
Introduction
2
Cost modeling project – top down models
3
Cost modeling project – bottom up model
4
Main lessons learned
25
BOTTOM-UP MODEL FLOW
Inputs
Calculation
Outputs
1
Demand forecast
2
Network design
3 Service costing
Service list –
market data
Network
assumptions
Unit costs
Depreciation
methodology
Routing factors
and mark-up
Final calculation
Service demand
Network assets
dimensioning
Network cost
Annualized costs
LRIC/LRIC+
per service
Unit cost per
service
• Demand for
each service,
divided
geographically
(sector – Fixed;
SMC – Mobile)
• Traffic
dimensioning
per asset (per
sector – Fixed;
per SMC –
Mobile)
• Calculation of
capital cost per
asset per
region
• Annualized total
capital cost per
asset per region
• LRIC per unit of
traffic of each
service, per region
• Final unit cost
of TU-RL, TURIU1, TU-RIU2,
VU-M e EILD
• Annualized total
operating costs
per asset per
region
• LRIC+ per unit of
traffic of each
service, per region
• Final
dimensioning
of network
assets
Source: Advisia
• Calculation of
total operating
costs per asset
per region
26
STRUCTURE OF THE DEMAND FORECAST MODEL
Module 1
Macro economic
forecast
• Total population
forecast
•
•
•
•
Module 2
Access
forecast
• Forecast of the
number of access of
several services:
GDP forecast
− Mobile access
Number of
− M2M
households forecast
− Active fixed access
Number of companies
− Broad band access
forecast
− Access of IPTV
Population by income
− EILD
ranges forecast
Module 3
Services
forecast
• Forecast of the total
amount of services
for the Brazilian
market
• List of services:
− VC1 on-net/Off-net
− Data traffic 2G
− SMS on-net/off-net
− Others
Module 4
Calculation by
SMC area/
by PGO sector
• Calculation of
demand forecast to
input in the bottom-up
model:
− By SMC area
− By PGO sector
This structure to demand projection follows the international best practices and is
adapted and adequate to the specific context of the Brazilian market
Source: Advisia
27
EXAMPLE OF FORECAST TECHNIQUE – OVERVIEW OF THE DIFFUSION TECHNIQUE
Adoption Variable
Innovators
• Adopt innovation
because of the product’s
intrinsic attractiveness
Imitators
Time
• Adopt innovation
because of social
influence
(communication,
network effect, etc.)
Diffusion model
Accumulated Adoption Variable
Diffusion Curves
Examples of Models:
Fisher-Pry: 𝑦 =
1
[1+𝑒 −𝑏 𝑡−𝑎 ]
Gompertz: 𝑦 = 𝑒 −𝑒
Bass: 𝑦 =
Time
−𝑏 𝑡−𝑎
1 − 𝑒 − 𝑝+𝑞 𝑡
𝑞
1 + 𝑝 (𝑒 − 𝑝+𝑞 𝑡 )
Diffusion is the process of penetration of new products, that is determined by intrinsic factors and social influences –
diffusion modeling is applied in several fields such as product development and epidemics propagation
Source: Advisia
28
THE MODELING WAS DEVELOPED CONSIDERING THE COMPLEXITY OF THE BRAZILIAN
MARKET...
Mobile
Demand of
Mobile Services
by SMC area
Network design
by SMC area
Aggregation
and design of
the network at
national level
Differentiated
expenditures by
region
Services
costing at
regional level
Aggregation
and design of
the network at
national level
Differentiated
expenditures by
region
Services costing
at regional level
Asset
aggregation
Differentiated
expenditures by
region
Services costing
at regional level
Fixed Core
Network design
by PGO sector
Demand of Fixed
Services by
PGO sector
Fixed Access
Network design
by PGO sector
Demand
Forecasts
Network Geographic
Design
Design of others aspects of network and
expenditures at regional level
Services costing at
regional level
29
… RESULTING IN A DETAILED STRUCTURE
Obligations for
Operator 1
Obligations for
Operator 2
Selected Operator
Hypothetical entry
data
Obligations for
Operator 3
Obligations for
Operator 4
Selected Obligations
Regulatory
obligation of
each operator
All remaining
inputs
(hypothetical
and specific of
each operator)
Selected entry data
SMC 1
SMC 2
SMC 3
SMC4
SMC 5
SMC 6
SMC 7
SMC 8
SMC 9
SMC 10
Calculation of
the Network
design
National Backbone
Expenditures
Calculation of
costs
Services Costing
(Region I)
Services Costing
(Region II)
Services Costing
(Region III)
30
THE NETWORK ALGORITHMS ALLOW FOR THE CALCULATION OF ASSOCIATED COST OF
THE MOBILE NETWORK
PS
Internet
POI
CK
CK
Servers,
NMS, revenue
TRX
TRX
TRX
NodeB
GGSN
TSC/
MSC-s
TRX
TRX
TRX
Hub
BTS
MSC/
MGW
SGSN
TRX
TRX
TRX
Hub
BSC
RNC
Hub
BTS
CK
CK
CK
CK
TRX
TRX
TRX
The number of assets implemented is determined
by the coverage and by the traffic and number of
subscribers
TRX
TRX
TRX
BTS
TRX
TRX
TRX
NodeB
BTS
31
CONCEPTUAL
PHASE VII DISCUSSES THE RECONCILIATION OF TOP-DOWN AND BOTTOM-UP MODELS
Based on
available
accounting data
Theoretical
efficient
enterprise
Regulatory
Challenge
Bottomup Model
Source: RTR, ITU, IRG 2005, Advisia
Top-dow
Model
Possible adjustments:
• Top-down:
- Exclusion of irrelevant
costs
- Inclusion of efficiency
adjustments
• Bottom-up:
- Opex adjustments based
on accounting data
- Inclusion of scorched
node assumptions
Range
32
SCHEDULE AND NEXT STEPS OVERVIEW
x
100%
II
Now
Operators´data processing and
validation
100%
I
Planning
x% % concluded
95%
III
FAC-HCA
Nov/11 – Aug/12
• Validate and consolidate
operators’ information (DSAC)
− Mobile operators
− Fixed operators
• Integrate DSAC information on
ABC/ABM aplication
• Develop training
Project phase
Aug/12 – Mar/13
95%
IV
FAC-CCA
Aug/12 – Msr13
5%
V
Sep/11
• Detail activities
• Define
responsible
• Develop
VI
detailed
schedule
•
•
•
•
Source: Advisia
LRIC
0%
VII
90%
Bottom up modeling
Dez/11 – Abr/13
Forecast services demand and define technology for models
Design and size models
Define costs of efficient operators
Train the team
Feb/13 – Jun/13
Tariffs
Jul-Set/13
• Develop
methodology
for tariffs’
definition
33
AGENDA
1
Introduction
2
Cost modeling project – top down models
3
Cost modeling project – bottom up model
4
Main lessons learned
34
SUMMARY– MAIN OPERATIONAL CHALLENGES OF THE PROJECT
Main Challenges
Profile differences
among operators
Data and Info
gathering within
required deadlines
Telecom sector
evolutionary
dynamics
Source: Advisia
Detailing
Project Approach
• Distinct realities among operators –
field , product portfolio scope,
business strategy, etc.
• Constant dialogue with operators – via
public consultation of documents, conjoin
and bilateral meetings
• How to reflect these differences in a
standard model?
• Composition of a team with significant
experience in the industry
• Difficulty by operators to gather data
within required deadlines
• Constant dialogue with operators –
Adjustments in the model or consideration of
alternative parameters
• How to consider parameters that
some operators are not able to
provide within the project’s deadline?
• Sector characterized by rapid
evolution in technology and
development of new products
• How the cost model will reflect this
technological evolution / products?
• Utilization of several sources of information:
Operators data, Anatel data, international
benchmarks, consortium experiences
• Development of the project with a dedicated
team from Anatel
• Continuous formal training of Anatel
throughout the project – training to conduct
adjustments and evolution of the model, after
the finalization of the project
35
IMPORTANCE OF INTERFACE WITH OPERATORS
International Best
Practices
Brazilian market context
Source: Advisia
• Participation of telecom sector
through:
‒ Obtainment of information
and data
‒ Multilateral meetings
‒ Bilateral meeting to clarify
‒ Society Consultation
‒ Delphi questionnaire
‒ Conceptual Paper
• Confidentiality assurance of data
and process transparency (tradeoff);
• Adequacy to operators’ reality
36
MAIN CHALLENGES OF THE PROJECT AND CONTINUITY
Main challenges
Management of
several
stakeholders
Interaction with
telecommunication
sector and society
Continuity and
applicability
Source: Advisia
Project approach
•
•
•
•
Structuring of a dedicated team at Anatel
Support to other areas of Anatel
Support to ITU
Operating model with the consortium: In presence meetings, conference
calls, video conference
• Participation of agents from telecommunication sector
•
•
•
•
Bilateral meetings: in presence, conference calls, video conference
Multilateral meetings
Consultation to operators: Data, information and clarifications
Consultation to society: including Public Consultation and questionnaires
to sector’s specialist (Agency, Operators, Governmental bodies,
associations, suppliers, academic institutions, research centers).
•
•
•
•
Training of Anatel team during project execution
Continuous follow-up and meeting with the Consortium
Anatel’s internal structuring for applicability of the cost models
Review and update of the models after project finalization
(Area/Structured team)
37
CONTACT DETAILS
Thanks!
Questions?
Contacts:
Daniel Wada
Phone:
daniel.wada@advisia.com
+55-11-96843-1663
38