Telecommunications
Infrastructure in EAP: The Way Forward
Second Workshop
Bali, 27-29 June 2004
John Ure
Director Telecommunications Research Project
University of Hong Kong
http://www.trp.hku.hk
Issues Addressed
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The Key Issue?
Investment in telecommunications in EAP –
setting the scene
Telecom’s 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?
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.’)
Introducing the
Investment Story
Fixed line teledensity by per capita GDP
Teledensity
20
Malaysia
18
China
16
14
12
Thailand
10
8
Vietnam
6
4
Mongolia
Philippines
Indonesia
2
Laos
Cambodia
0
0
1000
PNG
Per Capita GDP
2000
3000
4000
Source: EIU, World Bank, Paul Budd, ADB
Note: Fixed line teledensity figures for Cambodia, Mongolia and PNG are for 2001
5000
Mobile teledensity by per capita GDP
Teledensity
40
Malaysia
35
30
Thailand
25
20
Philippines
China
15
Mongolia
10
Indonesia
5
Cambodia
0
0
Vietnam
Laos
1000
PNG
2000
Per Capita GDP
3000
4000
Source: EIU, World Bank, Paul Budd, ADB
Note: Fixed line teledensity figures for Cambodia, Mongolia and PNG are for 2001
5000
Investment by Project Type
Nu m b er o f P ro jects
14
12
M an ag em en t an d
lease co n tract
10
G reen field P ro ject
8
D ivestitu re
6
4
C o n cessio n
2
02
20
01
20
99
98
97
96
95
94
00
20
19
19
19
19
19
19
93
19
92
19
91
19
19
90
0
F in an cial C lo su re Year
Source: World Bank PPI database
Investment by Sector
14
Num ber of Projects
12
M o bile Ac c e s s
10
8
F ixe d a nd M o bile
6
F ixe d Ac c e s s a nd Lo ng
D is ta nc e
4
2
01
00
02
20
20
98
97
96
99
20
19
19
19
19
95
19
93
92
91
94
19
19
19
19
19
90
0
F in a n c ia l C lo s u r e Y e a r
Source: World Bank PPI database
Telecom Investment in EAP
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Telecom = for 44% investment going into
infrastructure projects in developing
countries, 1990-2001
 Divestiture = 40% (partial privatization)
 Greenfield projects > 50% (mostly
mobile and mobile/fixed mix)
 Concessions = 8% (BTOs/BOTs)
From SOTE to POTE
Initial Investment
Privatization
IPOs, Auctions, JVs
Concessions
BTs, BTOs, BOTs
New Licences
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
Levels of Interest by Investors
Privatization
High
Medium
Concessions
Medium
Low
New Licences
High
Low
Issues of Concern to Investors
Tariff policy
USO
Exclusivity
Duration
‘New’ new entry
Interconnection
Unbundling
Transfer of assets
> 50% Control
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.
Has Investment Sentiment Changed?
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Pre-1997 - Pull factor (Return on Investment)
both necessary and sufficient
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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
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Investment sentiment more company focused
Investment in China’s and India’s 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)]
Introducing the
Telecom as
Utility Story
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 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
Technology
‘Moore’s Law’
Next
Generation
Networks
Standalone
Networks
vs
Falling cost vs Growing
of electronic
scale of
components
network
IP-structured
architecture
with routers
Contestable
markets
vs Diverse
software-driven
services
vs Externalities
(duplex)
Raising Barriers
Economics
Economies
of Scale
Economies
of scope
Network
Economics
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 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%
Switching and Transmission Costs Compared
Cost Estimates of Network Elements in Philippines
Network Elements
Average Costs (ballpark figures)
Mobile Cellular
US$50 per subscriber
Landline switching and equipment costs
US$600 per direct exchange line
Landline transmission and connection costs US$400 per direct exchange line
Landline NGN routing and equipment costs US$200-300 per direct exchange line
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%?
Fixed and Mobile Cost and Revenue Characteristics
Fixed
75C:25V - 40% sunk
High and falling
Regulated
Rebalancing
Steady
Falling
Costs
Mobile
70C:30V - 40% sunk
Half* and falling
Tariffs
Revenues
Competitive
Unbalancing
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 Factors
Critical Success Factors Form a Virtuous Loop
Technology
Innovation allowed to
influence regulation by-pass, licensing, etc.
Regulation
Prepared to
abandon PTT
model - more
open markets
Markets
Opportunities enabled by
regulation, encouraged
technological innovation
Technology Effects
Markets
• Mobile cellular (including pre-paid electronic transfers)
• Internet Protocol-enabled networks (including broadband)
• Wireless access (WLL, WiFi, WiMax, etc)
Policy & Regulation
Costs
• Deregulation of CPE and VAS
• Competitive and convergence
licensing
• Cost-based pricing
• 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
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
Costs
• Type approval procedures
• Spectrum management
• Deregulation of procurement
• Cost-based interconnect
• Tariff rebalancing
• Competitive pricing
Investment
• Opportunity through licensing
• Policies encourage market growth
• Free to choose technologies and market segments
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
Technology
• By-pass and arbitrage of
traditional tariff structures
• Flat-rate, Ramsey and
other pricing models
• Elasticity and investment
• 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
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
Revenues
• Incrementally efficient
• Transparent or revealed
through incentive mechanisms
• Wholesale/retail competition
regulation watchdog required
• 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
Models of Ownership
Ownership
Market
Private Participation
SOTE
Closed
Concessions (BT,BTO,
BOT)
Partial
Privatization
Partially Open Public-Private JVs
Fully Privatized Fully Open
Fully owned and
operated
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?
Some Questions and Answers
Questions
Answers
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Effects of tariff rebalancing?
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Can the provision of universal
access benefit investors?
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Is the concept of a universal
service fund the way to go?
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Is general taxation the way to go?
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Why licence telecom?
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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
Lessons from Telecom?
Some Questions and Answers
Questions
Answers
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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?
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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
Some Conclusions Applicable to Other Networked Utilities?
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Utilities subject to technological innovation
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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 M&A 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
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Is this best done industry specific or general?
What Role is Most Effective for the Public Sector
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Special Projects?
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Does cost-benefit analysis support the case? Would the private
sector investment? Are there externalities and public good
issues? etc) – examples include China’s 5 and 10 Year Plans;
Malaysia’s 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
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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