Hank Intven & Curt Howard EBRD, IDRC, JICA, Keio University ICT Seminar Tokyo, August 25, 2004

1. Least-Cost Subsidy Auctions forUniversal Access Telecom Projects:A Practical Implementation Guide Hank Intven & Curt Howard EBRD, IDRC, JICA, Keio University ICT Seminar Tokyo, August 25, 2004

2. Summary • Purpose of Presentation • Universal Access Strategy • Least-Cost Subsidy Auctions • Auction Process & Documents • Project Implementation Plan

3. Purpose of Presentation • A “big picture” summary of the least-cost subsidy auction approach to expanding telecom network access • Review of process & documents to implement an auction • Review of practical implementation issues

4. Universal Access Strategy • Regulators and government policy makers to develop Universal Access (UA) strategy to meet specific national or regional needs • Take stock of current and projected • telecom infrastructure and services • demand for services • Identify “gap” in infrastructure & services • Make policy to help fill gap • Least-cost subsidy auctions can use small subsidies to stimulate private sector investment to fill the gap & meet UA policy goals

5. market efficiencygap real access gap access targets access today Poverty Commercially feasible Needs intervention Customerhousehold penetration Geographic isolation ►Subsidy required to fill ‘real access gap’ ►The ‘Two Gaps’ Source: World Bank Discussion Paper No. 432, “Telecommunications & Information Services for the Poor…”

6. Least-cost Subsidy Auctions • Recognizes that a subsidy may be required to make network expansion economic in rural and high cost areas • Subsidy is efficiently targeted and auctioned to ensure least cost to funding agency • Proven approach for expansion of UA to telecommunications networks • Successful pioneer projects in South America (Chile, Peru, Colombia) • We advised Nepal NTA on implementing large rural UA project; and are currently advising Sri Lanka, Nigeria, Uganda and Burkina Faso • Other subsidy auction projects underway in Eastern Caucasus, Russia, Nicaragua, Bolivia, etc.

7. Basics of Subsidy Auction Approach • Define network expansion requirements - e.g. network with X capacity and Y performance criteria in Z locations • Run a transparent auction process for private operators to expand network • Qualify all interested bidders technically and financially capable of expanding network • Provide subsidy to the qualified bidder that requires lowest subsidy

8. Advantages of Subsidy Auctions • Auctions usually provide a one-time investment subsidy for private operators willing to expand network and provide required service • Well-run auction reduces size of subsidy and need for government financing • Market forces rather than the government determine the level of subsidy required • Auctions are competitively neutral and thus compliant with WTO rules for UA • Small subsidies can mobilize substantial private investment for UA

9. Financing the Subsidies • Subsidies may be financed by a UA Fund or by other sources, such as International Financial Institutions (IFIs) or international development agencies • UA Funds may be funded by : • Mandatory contributions from all telecom service providers (e.g. a specified percentage of revenue) • National budgets (tax revenues) • Contributions from IFIs?

10. Size of Rural SubsidiesSource: Adapted from World Bank Data

11. Designing the Project • Properly designing the infrastructure and services to be supplied is key to success in meeting UA needs • National UA policy/strategy • Usually defines general UA goals - generally does not specify network gaps to be filled or economic implications • Technical and service requirements • Network specs. – fixed, mobile, broadband – mixed • Services – e.g. public telephones, Internet access, call centres • Geographical coverage areas, rollout schedule

12. Designing the Project (2) • Market demand study • Review population dispersion, income, available services, unserved areas, etc. • Can assist in identifying demand for: • Network expansion • Types of services required and financially feasible (e.g. telephone, low or high speed Internet, shared telecentres, etc.) • Estimated revenues & subsidy requirements • Subsidy should cover net cost of network expansion – i.e. after deducting projected revenues from area to be served • Rule of thumb: Public will pay 2-3% of income for telecom services (next slide)

13. Designing the Project (3)Telecom Revenues as % of GDP

14. Implementing the Project:Subsidy Auction Documents • Key documents often include: • a Request for Applications to Pre-Qualify (‘RFPQ’) • a Request for Proposals (‘RFP’) • a contract for the provision of the services and payment of the subsidy (the ‘Service Agreement’) • a licence to operate the new network and provide the services (the ‘Licence’) • ‘Ancillary documents’ (bid bonds, performance guarantees, etc.)

15. Request to Pre-Qualify • RFPQs are often the initial document to ‘kick-off’ the process to award the Service Agreement and Licence to the lowest bidder • The RFPQ will often: • Introduce potential bidders to the project • Provide some background information on the national or regional telecom sector • Serve as an initial screening process for parties that will be permitted to participate in the full competition process initiated by the RFP

16. Request to Pre-Qualify (2) • Is prequalification process necessary? • Eliminating it can speed up process • However, a pre-qualification process can • Significantly reduce the number of bidders that participate in the full auction process (in some of our processes, 50+ bidders have applied) • place the focus on the best qualified bidders, and reduce problems and litigation from technically or financially unqualified bidders • Significantly reduce costs incurred by • less ‘serious’/qualified bidders who must otherwise prepare full proposals • funding agencies and their advisors that must fairly review and evaluate all proposals

17. Request for Proposals (‘RFP’) • Different terminology: RFP, Request for Applications, Tender document, etc. • Defines steps in competition process, and award of subsidy and Licence. • Should detail procedures for: • filing of proposals, opportunities for clarification questions, bidders conferences, revisions of RFP, and basic rules of competition • format and contents of proposal and information to be submitted • the evaluation of proposals – ‘licensing criteria’ must be provided under WTO Reference Paper • the selection of the successful bidder • the award of the Service Agreement and Licence

18. Service Agreement • Agreement is a good basis for governing payment of the subsidy – provides contractual certainty to permit financing of project – and service requirements • Alternate approaches can include licence conditions and letter of credit from UA Fund • Service Agreement specifies: • Network construction milestones, and service rollout • Technical performance requirements, including services to be provided, quality of service, etc. (similar to commercial telecom service agreements) • Penalties and remedies for failure to perform…

19. Service Agreement (2) • Service Agreements should also provide: • Procedures for certifying completion of phases of project & subsidy payments • Dispute resolution procedures • Other commercial provisions • Representations & Warranties • Performance guarantees • Term, termination & amendment rules • Force majeure and non-performance • Insurance, indemnity, etc. • Other standard commercial agreement terms

20. Telecom Operating Licence • Most countries’ laws require a licence to construct and operate networks and to provide basic telecom services • Licences typically contain main operational rights and obligations of telecom service providers • The operating rights and obligations of a licence are usually supplemented by • the subsidy-specific requirements of the Service Agreement (i.e. regarding construction and operation of the expanded network), and • general telecom laws and regulations

21. Licence to Operate New Network (2) • Various licensing approaches: • New licence designed for UA project • Adapt standard form of licence issued by Regulatory Authority • Amend licence of an existing operator, if an existing operator should win the competition for the subsidy contract • Spectrum licences • may be required in addition to operating licence • should be granted as part of initial licensing process without further cost or delay

22. Possible Implementation Plan • Develop or revise UA Policy • Amend any laws or policies to facilitate least-cost auction process • Undertake demand study/financial analysis of specific project(s) to be subsidized • Determine outputs: services & infrastructure - technical design and performance requirements • Prepare auction process documents • Identify possible bidders, issue RFPQ and commence marketing activities

23. Possible Implementation Plan (2) • Evaluate applications to pre-qualify • Issue RFP document to pre-qualified parties • Questions of clarification from bidders (and entertain proposed changes?) • Conduct pre-bid meeting with pre-qualified parties • Answer questions of clarification and make necessary changes to process to meet market requirements

24. Possible Implementation Plan (3) • Deadline for submission of proposals • Evaluate proposals • Option: Issue of Letter of Intent to the qualified bidder(s) with lowest subsidy bid; (i.e. intent to award subsidy once any necessary preconditions are met) • Winning bidder(s) comply with preconditions (e.g. incorporation of local company, submission of performance guarantee, etc.) • Execute Service Agreement and issue Licence

25. Possible Implementation Plan (4) • Winning bidder(s) begin network rollout • Subsidy payments made in accordance with service rollout milestones • Ongoing monitoring and reporting requirements • Network rollout and subsidy payments completed in accordance with schedule in Service Agreement

26. Role of Professional Advisors • Assist with • design of UA policy/strategy • demand studies, technical and financial analysis to define network ‘gap’ to be filled • designing technical & service requirements • preparing auction process documents • running auction process – marketing, bidder conferences, Q&A, revising structures to meet market demands, problem-solving • Advise on best international practices and their application to the local environment • Expedite implementation through use of proven precedents and problem-solving approaches

27. Keys to a Successful Auction • Assess market demand and business requirements of service suppliers; match both to develop a financially realistic project • Establish key regulatory conditions (e.g. tariff policies, interconnection rates, market exclusivity, etc.) to reduce financial risk • Reduce unnecessary regulation and government impediments to investment • Develop a clear and transparent auction process – use standard commercial and regulatory approaches that will promote regulatory and business success

28. For Further Information:Hank Intven: hintven@mccarthy.caCurt Howard: choward@mccarthy.caMcCarthy Tétrault LLPSuite 4700, TD Bank Tower, 66 Wellington St. WestToronto, ON Canada M5K 1E6Tel: +1 (416) 601-7878Fax: +1 (416) 868-0673