paul moffatt, counsel, ebrd policy and regulation in telecommunications paul moffatt, counsel, ebrd...

Policy and Regulation in Telecommunications

Paul Moffatt, Counsel, EBRDPaul Moffatt, Counsel, EBRDSarajevo, 19 April 2002

European BankEuropean Bankfor Reconstruction and for Reconstruction and

DevelopmentDevelopment

European BankEuropean Bankfor Reconstruction and Developmentfor Reconstruction and Development

EBRD participation in the Telecommunications Sector

Purpose of Telecommunications Sector Policy

Key sector objectivesExpected evolution of the sector Initiatives for achieving sector objectivesCurrent sector statusCurrent sector issuesSummary of recommendations for further

development

Policy and Regulation in the Policy and Regulation in the Telecommunications Sector Telecommunications Sector


Resident Offices

Regional Offices

Headquarters

EBRD Participation in TransitionEBRD Participation in Transition

Albania Armenia Azerbaijan Belarus Bosnia and Herzegovina Bulgaria Croatia Czech Republic Estonia FYR Macedonia Georgia Hungary Kazakhstan Kyrgyzstan Latvia Lithuania Moldova Poland Romania Russian Federation Slovak Republic Slovenia Tajikistan Turkmenistan Ukraine Uzbekistan Yugoslavia


EBRD Participation in EBRD Participation in TelecommunicationsTelecommunications

Three general forms of participation in the sector: Legal transition programme

EBRD’s initiative to contribute to the improvement of the investment climate in the Bank’s countries of operations by helping create an investor-friendly, transparent and predictable legal environment;

Participation in privatisation Pre Privatisation Loans; Post-Privatisation Loans; Equity Holdings.

Participation in other investments in the sector


Purpose of Telecommunications Purpose of Telecommunications Sector PolicySector Policy

Telecommunications Sector Policy should be designed to define the parameters within which the telecommunications sector should operate and develop in Bosnia and Herzegovina over the next 3-5 years.

Policy is never unchangeable but it should not be altered without discussion and a conscious decision to proceed on an altered course.

Sector policy is the responsibility of Government and should be resolved in the interest of Bosnia and Herzegovina.


Principle Objectives of Sector Principle Objectives of Sector PolicyPolicy

To improve the quality, spread and type of telecommunications services, thereby satisfying demand, promoting economic development and ensuring a continuing contribution to the national budget.


Economic and Social Policy Economic and Social Policy ObjectivesObjectives

Economic objective: services should satisfy full range of consumer demand and be supplied under conditions of optimal efficiency.

Social objective: services should be made available to all on reasonable terms, whether or not it is profitable to do so.

Universal provision of basic telecommunications services of an acceptable quality of service at an

affordable price


Expected Evolution of the Expected Evolution of the SectorSector

StartMedium

TermLong Term

State Ownership & Regulation

Public Monopoly of Telecom

Services

Independent Regulator

Established

Privatise Incumbent(s)

Competitive Market

Competitive Safeguards in

Place

Liberalisation of all telecom services

Selected Services Opened to

Competition


Initiatives for Achieving Sector Initiatives for Achieving Sector ObjectivesObjectives

Liberalisation of the sector:

Creates positive incentives to improve services and lower tariffs;

Attract investment, in order to promote the development of the sector:

Best achieved through privatisation of state owned operators, through sale of a controlling stake to a strategic investor, bringing foreign investment and improved management into the sector.


Initiatives - LiberalisationInitiatives - LiberalisationAn appropriate regulatory framework is necessary to guide the sector from gradually developing liberalisation to full competition.

This will involve the imposition of regulatory obligations on operators aimed addressing market failures and fulfilling social policy, e.g.;

The regulation of tariffs in the absence of effective competition; Obligations with respect to interconnection of networks; Certain disclosure of technical specifications and interconnect prices in

order to permit fair interconnection between competitors etc.;

Adoption of a universal service and access policy.


Initiatives - Attract Investment Initiatives - Attract Investment (1)(1)

Privatisation by sale of stake to Strategic Foreign Investor:

Vital for future development ;

Incumbent operators urgently need capital to upgrade the networks. With the constraints imposed on government budget in BiH, the operators are unlikely to be able to raise the necessary funds from central budget;

Only the opening of telecommunications networks to private investment will offer necessary finance;

Relays beneficial messages it to the investment community about the normalisation of BiH;

Will facilitate and be a catalyst for most other policy elements, i.e. competitive provision of services, network roll-out, maximisation of the value of the state operators.


InitiativesInitiatives - Attract Investment - Attract Investment (2)(2)

Privatisation Objectives: Ensure the sector is a stimulus rather than a

bottleneck to general economic development;

Improve the quality and quantity of service;

Put the company on a sound commercial footing, increasing efficiency, so as to enable it to function in a competitive environment;

Unlock the large intrinsic financial value of the sector;

Prepare the ground for full market liberalisation.


InitiativesInitiatives - Attract Investment - Attract Investment (3)(3)

Essential ingredients:A stable and predictable regulatory regime: there must

be regulatory clarity in order to encourage investors (strategic and otherwise) into the marketplace;

An adequate legal framework and conditions for inward investment (In addition to an adequate regulatory framework, this would also include corporate governance, corporate law, dividend repatriation, etc.);

A demonstrable ability to implement commercial practices for management, technical operation and financing of the company.



020406080

100120140160180200

-3 -2 -1 0 1 2 3

Access to Basic Service: Fixed Lines per 100 inhabitants

Estonia

Czech Rep

Hungary

Pre-privatisation Post-privatisation

0

20

40

60

80

100

120

-3 -2 -1 0 1 2 3

Fixed Lines Waiting ListFixed Lines Waiting List

EstoniaCzech Rep

Hungary


0

20

40

60

80

100

120

140

-3 -2 -1 0 1 2 3

Employment Employment

Estonia

Czech Rep Hungary


0

100

200

300

400

500

600

700

-3 -2 -1 0 1 2 3

Network InvestmentNetwork Investment Estonia

Czech Rep

Hungary


Impact of Privatisation



0

50

100

150

200

250

300

350

-3 -2 -1 0 1 2 3

Estonia

Hungary

Czech Rep


Impact of Privatisation - Economy-wide Foreign Impact of Privatisation - Economy-wide Foreign Direct InvestmentDirect Investment


Current Sector Status - PolicyCurrent Sector Status - Policy

Recently Updated - March 2002;

Selection of Privatisation Advisors by March 2002, begin privatising by July 2002;

Liberalise all but International Voice Services by June/Dec 2002;

Liberalise International Voice Services at End of 2005;

Adopt tariff rebalancing mechanism by March 2002 (rebalancing by 2006);

Convene Universal Service Forum and define services and determine a funding mechanism by September 2002.


Current Sector Status - Current Sector Status - Regulatory Regulatory FrameworkFramework

A large part of a regulatory framework is already in place in BiH, in the form of the CRA. Among CRA’s successes have been:

– The issue of national country-wide licences to the GSM operators of both the Federation and to RS enabling them, inter alia, to provide national and international services throughout BiH;

– The development of crucially important regulatory rules

that will further facilitate the emergence of a competitive market. E.g. Interconnection rule, Leased Lines Rule;

– Issuing of revised fixed licences to the state-owned incumbent operators.


Current Policy and Regulatory Current Policy and Regulatory IssuesIssues

Privatisation;

Framework telecommunications law;

Entity telecommunications laws;

Regulatory capability within the Entities;

Completion of the separation of telecommunications functions from that of posts;

Corporate structure of BiH operators;

Tariffing;

Tariff re-balancing;

Universal Service.


BiH Framework BiH Framework Telecommunications LawTelecommunications Law

Current framework telecommunications law somewhat outdated;

Requirement for updated framework law;

Main purposes of framework telecom law;

Define national telecom policy objectives;

Define types of operations & facilities to reduce regulatory uncertainty;

Establish structure, role duties and powers of regulatory authority;

Establishes licensing regime and defines types of services to be licensed;

Sets rules for licensing process, including issuance of licences, amendment, monitoring and compliance;

Interconnection & network unbundling provisions;

Spectrum management.


BiH Framework BiH Framework Telecommunications Law (2)Telecommunications Law (2)

Procedural provisions of telecom laws or regulations

Required to ensure public and investor confidence;

Transparent and fair licensing processes will maximise investment;

Appeals, review & government oversight role should be clear;

Regulatory functions should be exercised through clear, reasoned decisions in accordance with stated policies to eliminate uncertainty;

Public reporting of key facility and traffic data required for informed regulation and competitive entry.


Regulation in the EntitiesRegulation in the Entities In terms of statehood, BiH is quite unique;

This uniqueness creates challenges for the regulatory regime;

The division of regulatory responsibilities between state and entity levels creates the need for co-ordination among the bodies concerned. In some cases, such as tariffs, interconnection and operating standards for basic telephone services, a close co-ordination of policies between state and entities is required;

While state level regulatory framework has been established and is now functioning (relatively successfully), little has been done on a formal basis at entity level to either promulgate state regulatory policy or facilitate the development of entity level policy and machinery that is both appropriate to their competencies and fully consistent with state policy.


Separation of Post From Separation of Post From TelecommunicationsTelecommunications

Widely acknowledged as an essential prerequisite for privatisation;

Partially achieved but needs full implementation for co-ordination of policy;

Relevant authorities will need to address this issue as a matter of urgency.


Corporate Corporate Structure of BiH Structure of BiH OperatorsOperators

The present structure appears to be based upon technical functions such as switching/routing and transmission, which largely relate to a pre-digital era;

Such a structure is hardly appropriate for today’s commercial environment and, consequently, reorganisation, commercialisation and corporatisation of the BiH operators are essential elements in the run up to privatisation and further liberalisation;

Without a fully transparent organisation and defined assets private investors cannot be attracted, either foreign or domestic;

Such reorganisation and corporatisation is essential for an operator to compete effectively in a competitive and liberalised world and would place any potential investor in a better position to evaluate opportunities


TariffsTariffs

Tariff regulation is required where there is a real risk of abuse of market power. What ever means of price regulation is chosen should promote long term investment to expand & upgrade network, while ensuring that tariffs are affordable for as much of the population as possible; Two main options:

Option 1 - earnings regulation - allows operator to set prices to recover operating costs plus a reasonable return on investment;

Option 2 - price cap regulation - prices fixed - usually with annual adjustments for inflation and expected productivity gains.


Tariff RebalancingTariff Rebalancing Tariff rebalancing is the process of adapting the system of political and

social prices of public monopolists to a new system of cost utility oriented prices of competitive private operators;

In a competitive market prices cannot deviate for long from the individual costs of providing a service to the customer, therefore tariff rebalancing reflects the cost development of modern technologies in telecommunications;

Major general cost trends are: - total cost for telecommunications services of a certain quality go down; - usage of networks becomes less costly than access to the network; - costs for international and long distance calls are falling faster than

local calls.


Tariff Rebalancing (2)Tariff Rebalancing (2)

The difference in price is often used to subsidise loss making areas of the market (e.g. local calls subsidised by international calls);

Unbalanced prices unsustainable in competitive environment;

Important to return tariffs to a cost basis;

There must be a definite timetable, co-ordinated with other policies.


Universal ServiceUniversal Service Access to socially important services is a crucial political, social and economic

issue; Present tariff structures in BiH, whereby profitable international voice services are

used to cross-subsidise loss making local voice services will no longer be sustainable in a liberalised market;

A new policy approach is required to support access to socially important services; This approach should be aimed at encouraging network roll-out through-out BiH,

such that would enable access to basic telecommunications services at a reasonable price thereby reducing negative impacts on socially or geographically disadvantaged areas. The principal policy objectives in this respect are: To permit full participation by all citizens in today’s information society; To promote national political, economic and cultural cohesion; To facilitate economic development; To eliminate disparity, perceived or otherwise, between urban and rural

communities.


Universal Service (2)Universal Service (2)

Universal service policy should be clarified; Services should be defined - focus on uneconomic access

service; Generally accepted criteria should be applied: transparent, non-

discriminatory and competitively neutral - not more burdensome than necessary for the defined universal service;

There are two key components: Specify extent of obligations on incumbents - to permit

investors to quantify and limit liability to provide uneconomic service to existing and new subscribers

Provide efficient & transparent mechanism to finance provision of new non-economic services (e.g. Fund)

Apply accepted principles to the mechanism


Summary of RecommendationsSummary of Recommendations

Implement Privatisation Policy without delay;

Enact new BiH telecommunications law - incorporating the various policy and regulatory instruments in place in sector today;

Harmonise Entity sector legislation with that of BiH;

Continue development of regulatory framework, to include regulatory capacity for Entities;

Finalise separation of post from telecommunications;

Implement tariff and tariff rebalancing policy without delay - key to both liberalisation and privatisation;

Define and implement universal service objective and mechanism without delay - this is also key to liberalisation and privatisation

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