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

1. 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

2. Issues Addressed • 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?

3. 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.’)

4. Introducing the Investment Story

5. 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

6. 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

7. Investment by Project Type Source: World Bank PPI database

8. Investment by Sector Source: World Bank PPI database

9. Telecom Investment in EAP • 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)

10. 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

11. 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 > 50% Control

12. 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.

13. 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 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)]

14. Introducing the Telecom as Utility Story

15. 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.

16. Lowering Barriers Countervailing tendencies Raising Barriers Technology vs Economics ‘Moore’s Law’ Economies of Scale 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)

17. 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%

18. 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%?

19. Fixed and Mobile Cost and Revenue Characteristics Costs Fixed Mobile 75C:25V - 40% sunk 70C:30V - 40% sunk High and falling Half* and falling Tariffs Regulated Competitive Rebalancing Unbalancing Revenues Steady Falling 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

20. Critical Success Factors

21. 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

22. 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

23. 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

24. 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

25. 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

26. 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?

27. 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 Lessons From Telecom? Some Questions and Answers

28. 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 Lessons from Telecom?Some Questions and Answers

29. 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 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 • Is this best done industry specific or general?

30. 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 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 • 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