|Issue:||Africa and the Middle East 1999|
|Topic:||An Evolution from an IGO to a Private Company|
Established as a unique international treaty organisation, Inmarsat was created by the International Maritime Organisation in 1979 to serve the needs of the maritime community for safe, secure distress and commercial satellite communications. Its creation as an intergovernmental organisation (IGO), reflected the widespread belief that there was a limited market for mobile satellite services and that government involvement was necessary.
Introduction However, dramatic growth in the use of the Inmarsat system has occurred over the past 20 years with the addition of services catering for aeronautical and land mobile markets. In its brief history Inmarsat has pioneered a number of satellite services including small paging devices to laptop-sized phones and high-speed data units. Now, new smaller, more-powerful products are in the pipeline using the latest generation of Inmarsat-3 satellites. During the 1980s and early 1990s, Inmarsat enjoyed its unique position as the worlds first and only global mobile satellite communications operator but gradually, over the past few years, it has been facing growing competition – from terrestrial mobile and other new satellite services. These new technologies and emerging competition are already changing Inmarsats core business and severe erosion of many of its major markets over the next few years is expected. In addition, the telecommunications industry in which Inmarsat operates is also changing rapidly, from the system of protected natural monopolies to one of greater openness and global competition. Commercial flexibility needed To respond to the competitive challenge, Inmarsat had to act in a way that would allow it to quickly develop new services for new markets. However, in order to realise this ambition a change in structure would be required. That change occurred on 15th April 1999. The intergovernmental rigid structure forced owners (the signatories, representatives of the member countries of Inmarsat, usually the countrys national telecoms administration) to invest at a level corresponding to their use of the Inmarsat system. Unless the structure became more flexible, investors would no longer supply the necessary funds to develop and implement Inmarsats future services. Nor did the structure allow for external (non-signatory) investors. And it lacked modern governance needed for fast decision-making. In short, although Inmarsats structure worked well in the 1980s, it lacked the commercial flexibility to operate successfully in the emerging competitive environment. In part, Inmarsat was created to ensure reliable Global Maritime Distress and Safety Services (GMDSS). Inmarsats convention also specifies that the organisation must not discriminate on the basis of nationality and must only be used for peaceful purposes. Additionally, it should seek to serve all areas where there is a need for mobile satellite communications and, in keeping with its non-discriminatory nature, promote fair competition. Oversight of these public service obligations was provided by its member governments through the Inmarsat Assembly. And while Inmarsats business has expanded, its public service obligations continue to be important. In any new future structure, intergovernmental oversight of these obligations must remain effective. The new structure, then, had to take account of and balance the requirements of two, quite different objectives. In its new guise it had to operate as a commercial enterprise – with a modern corporate structure, a fiduciary board, an open and voluntary investment structure, limited liability and national registration. But it needed to retain some elements of its intergovernmental character – governed by an Assembly of Parties, with a new secretariat, but with mechanisms to ensure the continuation of its GMDSS and public service obligations and the retention of privileges and immunities for an IGO. By mid-1996, Inmarsats then governing body, Council, had agreed on a new commercial structure which, in its view, met the principles and essential elements laid down by the Assembly. Parties to the Assembly met in London in April 1998 and endorsed the new structure and approved the necessary constitutional changes. The agreement came after a four-year process of analysing the future structure issue. The new structure, known as New Inmarsat, managed to combine the two principal objectives of preservation of Inmarsats intergovernmental character and the creation of a new, commercial enterprise. The diagram below shows the main features of the structure and the four instruments through which the International mobile Satellite Organisation (IMSO), the new intergovernmental arm of New Inmarsat, will exercise its public services oversight over the new commercial companies. Intergovernmental oversight In the new structure the intergovernmental nature of the organisation is preserved and international oversight of the companies public service obligations, including GMDSS, continues to be enforced by IMSO through the Assembly of Parties and Secretariat. Membership in IMSO is open to all countries and each member government (Party) has one vote at the Assembly. Decisions on matters of substance are taken by a two-thirds majority and on procedural matters by a simple majority. A Secretariat for IMSO has been established and a Director elected by the Assembly to act as the legal representative of the organisation. The Director is assisted in his duties by one technical officer and one senior administrator, who together will ensure that the secretariat fulfils its mandate to oversee the public service activities of the companies and represent the organisation at intergovernmental fora. The New Inmarsat structure also provides for effective oversight of the basic principles as determined by the Assembly. The first basic principle, the continued provision of GMDSS, is included in the amended Convention of IMSO, the Articles of Association of the companies, the Public Services Agreement between IMSO and the companies and the Land Earth Station (LES) Operator Agreement. The Public Services Agreement provides a precise definition of the obligations of the companies to IMSO for continued provision of GMDSS. The four other basic principles are expressed as broader policy obligations and also included in the amended Convention and Public Services Agreement and the Articles of Association of the companies. The peaceful purposes and fair competition obligations have never been defined in terms suited to enforceable contractual undertakings, but their inclusion in the Articles of Association places a legal obligation on the Directors to have due regard to them in exercising their powers. The companies Articles of Association require the Board of Directors to have regard to these basic principles when exercising their powers to manage the companies. Any Board decision “which may have a material adverse affect upon the provision of any of the public service obligations” will require the approval of the shareholders. Enforcement mechanisms The enforcement mechanisms for the new Inmarsat Structure enable IMSO to oversee and, if necessary, ensure the observance by the companies of the basic principles (and to implement any other provision of the amended Convention as appropriate). IMSO owns a special share giving it three unique powers: to veto specified changes to the Articles of Association that might adversely affect the basic principles; to demand a meeting with the Board to express its concerns as a special shareholder about compliance with the basic principles; and to address the next Annual General Meeting (AGM) or convene an Extraordinary General Meeting (EGM) of the shareholders to consider and propose resolutions with respect to any Board decision of the kind referred to above. IMSO enforcement of the companies obligations is exercised through a six-step mechanism. Steps 1 to 4 apply to all of the basic principles. Steps 5 and 6 apply to the GMDSS, non-discrimination and seek to serve obligations in the contract. The new companies will provide limited funding to cover IMSO Secretariat operational costs, with provision for consultations on any increases needed. Additionally, a sum is held in a contingency fund to meet the costs of any enforcement proceedings taken by IMSO under the Public Services Agreement. The fund is then to be replenished as necessary. Benefits of a corporate structure The new Inmarsat group of companies are nationally-registered, limited liability corporations operating under recognised commercial principles and established corporate law. A few of the important benefits are that previous signatories became shareholders in a new holding company with each investor receiving ordinary shares in proportion to its previous investment share; the companies are governed by a fiduciary Board of Directors, elected by shareholders, which must act in the best interests of the companies; the old investment structure is replaced by one providing open and voluntary share transfer and new share issues, and broad ownership – participation by small investors and consideration of developing country interests is enhanced through a number of measures. These include limiting maximum share ownership and voting power limit to 15% of total shares, unless a shareholder held a greater proportion at the date of transition; no minimum investment level; all shareholders to have pre-emptive rights associated with the issue of new shares; and the Board of Directors to have the discretion to issue shares to strategic investors, up to a total value of US$500 million. On transition, signatories were issued with shares in Inmarsat Holding Limited in proportion to their pre-transition investment share-holding in Inmarsat. Following transition to the new structure, share transfers are open and voluntary and allow external investors to purchase shares in the holding company from existing shareholders. However, in order to balance the short-term need for business stability with the longer-term objective investment flexibility, a multilateral “right of first refusal” share transfer mechanism is being adopted for the first 12 months. Following the expiry of this period, all share transfers will be on a purely bilateral basis and no restrictions will be placed on the sale of those shares to external investors. The companies are governed by a 14 member fiduciary Board of Directors, which includes the Chief Executive Officer (CEO) as the only executive Director on the Board. The companies Articles of Association detail the composition of the board as follows: · nine non-executive Directors elected by all shareholders on the basis of cumulative voting. · three non-executive Directors elected by all shareholders on the basis of one vote per investor, irrespective of share-holding. · an Independent Director who is not an employee, supplier or customer of Inmarsat, is also to be appointed. The CEO is to be appointed by the non-executive Directors and is not eligible to become Chairman or vice-Chairman of the Board, so as not to concentrate too much power in the hands of one individual. The companies conduct certain activities through Board Committees. One of these is the Nominations Committee, which has the power to nominate and vet candidates for the Independent Director post and the three Board seats set aside for small investor and developing country candidates. Another is the Land Earth Station (LES) Committee, charged with the oversight and implementation of the LES Operator agreements. Due to the potential conflicts of interests, a majority of the Committee will be made up by the Independent Director and Directors not associated with any LES operators. A number of features of the New Inmarsat structure are designed to enhance broad ownership and participation by small investors and to take into account the interests of developing countries. One of these, formal regional meetings of investors, is a means of enhancing participation by and communication with investors in all parts of the world. The Articles of Association provide for the establishment of regional groupings representing all of the shareholders and the Board of Directors is required to consider any reports and recommendations from each meeting. Under the old organisations arrangement, some signatories also operated Inmarsat land earth stations. In the new structure, the companies ensure the provision of existing and evolved services according to the pre-existing LES operator relationships through binding contractual agreements, while providing for new and different commercial arrangements for the provision of future services. The founding documents of the companies provide for the re-registration of Inmarsat Holdings Limited as a public limited company (plc) and an Initial Public Offering (IPO or stock market listing) of its shares within approximately two years of creation of the new structure, subject to the advice of an investment bank. The decision to list the companys shares on a stock exchange will be taken by the Board of Directors. Meeting developing countries concerns To summarise, Inmarsats new corporate structure, as outlined above, incorporates many features to meet the concerns of developing countries and small investors. These include the availability of IMSO membership to all countries, the elimination of the requirement for mandatory investment and the removal of minimum or low maximum investment limits. The key points are that investment is open to external (non-signatory) investors; the main Board includes three developing country / small investor directors; the establishment of an independent LES Committee; an IMSO Director is to be on the Public Services Committee; and that regular, formal regional meetings of investors are to be held. The removal of Inmarsats former privileges and immunities for commercial activities provides a level playing field for New Inmarsat and its competitors. Meanwhile, financial flexibility and improved governance resulting from the transition provides new business and investment opportunities for the company and its shareholders. The end result is that new products and services made possible by privatisation provide greater choice for customers and the commercial success this brings will ensure that core public services are protected and expanded in the future. Conclusion The telecommunication liberalisation process in many African countries has led to the creation of new private companies, which are able to react faster to changing market conditions. Inmarsats drive for a more flexible and commercial framework, while maintaining its public service obligations and consideration of developing country concerns, has ensured that strategic investment in Inmarsat remains a viable opportunity for many of these African companies. Nor does the new structure negate the possibility of project-specific joint ventures with African telecommunications operators where the benefits are mutually advantageous. Further, the regional meetings provide a mechanism to inform and involve African shareholders in the company developments. Finally, the ground making transition to the New Inmarsat structure may be seen as a possible model for RASCOM, the African regional satellite organisation, and indeed for other intergovernmental satellite organisations such as EUTELSAT and INTELSAT.