|Asia-Pacific I 1999
|Financing International Telecommunications Projects for Asia
|Tara K. Giunta
|Coudert Brothers, United States of America
The demand for finance into the capital-intensive telecommunications sector has always been great. Today, the race for capital and the creativity needed to attract that capital -has reached epic proportions. During the past year-and-a-half, Asia has faced a severe economic crisis. The resulting economic turmoil has had an impact on all industry sectors in the region, including the telecommunications sector.
Since the beginning of 1998, numerous telecommunications projects have been put on hold, particularly in ?hard-hit? countries such as Indonesia, Thailand and Malaysia. The negative effects of the economic crisis in the telecommunications sector – declining growth rates, the increased cost of covering foreign debt and the increased difficulty to access international funding – are making it more difficult for Asian companies to compete globally. Nevertheless, the overall prospects for growth in the telecommunications market in the region are significant. Asia accounts for approximately 58% of the worlds population. Its telecommunications market has an estimated value of US$130 billion. Despite a population of about 3.4 billion, only 6 out of every 100 people in Asia have a telephone. These factors make the region a potentially attractive market for telecommunications projects. One unexpected result of the current economic crisis is that it may act as a stimulus to establishing long-term benefits, such as relaxing foreign ownership restrictions, deregulation of the marketplace and promoting consolidation. Many countries in the region have already committed themselves to the World Trade Organization (WTO) Basic Telecommunications Agreement to liberalize their telecommunications markets. The implementation of such commitments has been somewhat speedy for some companies in order to attract the capital investment sorely needed in times of turmoil. The issue remains whether these measures are sufficient to attract investors to a market that currently faces such high risk. Critical Issues to Consider in Financing Projects The financing There are a number of potential risk factors involved in the finance of any project such as currency, political, legal, technology and project risks. Investors hit hard by the economic crisis in Asia have learned a lesson about the importance of assessing the risks associated with any investment. In fact, in cases where investors have failed to evaluate the risks associated with the involvement in projects in the region. Currency Risk To understand currency risk, one need to look no further than to the impact of the currency devaluation in Asia. In Indonesia, for example, where the rupiah has fallen as much as 70% since the beginning of the crisis, PT Telekom suffered earnings that where much lower than they expected due to foreign exchange losses. Many Indonesian companies, including the KSOs, are either bankrupt or have defaulted on their debt payments. Construction to meet the significant built-out requirements for laying down telephone lines in five regions by March 1999 were basically stopped given the unpredictability of the currency in Indonesia.Political Risk Political stability is an important factor when determining the extent of risk associated with a particular project. Even in bullish markets, investors have been somewhat reluctant to invest in volatile political climates. The economic crisis has destabilized the political situation in many countries in Asia. A heightened political risk, generally has an impact on l other risk factors. Without political stability, the other risks loom that much more ominously. Legal Risk Any company looking to invest generally assesses the legal environment of a country in order to determine the amount of risk involved. In many Asian countries as well as in other regions, legal regimes still contain restrictions limiting foreign participation into national companies, foreign ownership of property, repatriation of profits and exchange currency controls. These restrictions can make a particular investment less attractive. . Foreign investors must also consider the likelihood of changes to the legal system that may impose further restrictions.. Many governments in Asia are currently instituting legal reforms to entice investors, such as relaxing foreign investment restrictions. However, there is also a risk that countries will impose additional restrictions that may impede private investment. One can only guess what the far ranging impact such a decision will have on the global economy. Technology Risk In the rapidly changing world of telecommunications, technological risks plays a central role. It is difficult to predict what type of technology will succeed in the marketplace. There are multiple technological options available on the market. Given to many choices , investors are in danger of making disasters decisions. Given the prevailing economic situation in Asia, it is unlikely that investors will venture into new technologies that may seem too risky. One technology that investors seem to be willing to invest in regardless is Internet services, due to the high demand for such services in the region. In the late 1980s, three-fourths of telephone traffic in developing countries was voice. Today, 65% of this traffic is Internet. In Asia, where international traffic is growing 11% per year, Internet traffic is more than quadrupling. Asias Internet usage is growing with about 500% a year, compared to 300% in the United States. At current growth rates, Asias Internet users will reach 37 million by 2001 if the number of users continue to grow at current rates, surpassing Europes 30 million. Project Risk Prior to the current economic crisis, it was generally the case that if a project included a consortium of strong players, an investor could largely be assured that the consortium would hold. The risk companies withdrawing from a project was typically minimal. Still the greatest risks from an investors point of view, lies with the uncertainties in the global marketplace. Factors to Consider in Determining Investing in a Company Access to Capital Telecommunications is a capital-intensive business, requiring a substantial amount of capital in order to build out a telecommunications system. A company must have access to capital in order to stay competitive. The economic crisis in Asia, however, has severely reduced funds the crisis having effectively shut down the capital markets for most companies in the region. In 1997, 11 telecommunications companies offered their shares on the local capital markets. By the end of 1998, only two such companies ? had gone to local capital markets?. Similarly, in 1997, 19 companies offered their shares on international capital markets. None did so by the end of 1998. Strapped for cash and weighted down by heavy debt and foreign exchange losses, telecommunications companies in Asia are looking for alternative routes to raise much needed capital, such as offering equity to vendors in anticipation of renegotiating loan commitments. Strong Balance Sheet Given the economic crisis, telecommunications companies need a strong balance sheet in order to to succeed in the marketplace. Debt-ridden companies are finding it extremely difficult to deal with the economic downturn in respective countries. With large debts on their balance sheets, these companies finance is scarce. Companies that arent debt-ridden, on the other hand, have been able to obtain the necessary financing. For example, debt-free mobile operator, Advanced Information Services of Thailand was one of the few firms in the country that was able to negotiate a US$64.7 million loan agreement with German banks to expand its transmission network. Well-capitalized companies such as NTT, Hongkong Telecom and SingTel will have the opportunity to increase their market position at the expense of their less well-capitalized competitors. Effective Operating Structure and Management The development of an efficient operating and management structure is also an important factor for investors. A companys ability to hire effective employees and make productive use of them will provide an advantage over competitors. Additionally, good management is an essential tool. For example, in an effort to make its company more attractive to private investors and reduce operating costs, Korea Telecom ordered a restructuring, including a reduction of its workforce and a revamping of its management. Unfortunately, such moves are likely to generate layoffs and, leading to hostility from the, government and from labor unions. Marketplace In determining the attractiveness of a market, investors typically assess the size of the marketplace and the anticipated demand for services. As the Asian economic crisis demonstrates, it is also necessary to consider a customers ability to pay for services. In Thailand, for example, a large portion of TelecomAsias corporate users stopped paying their bills. The number of disconnection due to non-payment reached such significant proportions that the company stopped disconnecting services and instead offered its customers an option to keep their lines in exchange for entering into an installment plan to make payments. Keeping customers can be a two-edged sword, though. On the one hand, the demand is there. On the other, customers cannot pay for the service. Rational payment plans, resulting in customer payments can help (even if on a reduced scale) service debt, and thereby attract investment and willingness to work through these hopefully short-term issues. Impact of Economic Turmoil on Telecommunications Investments in Asia Under the WTO, Hong Kong, Indonesia, Japan, Korea, Malaysia, Singapore, Sri Lanka and Thailand made commitments to introduce competition into their telecommunications markets. The economic turmoil in Asia, however, has created a lack of capital. This has forced many of the governments in the region to eliminate protective measures at a faster pace than originally anticipated. Foreign Ownership Creative finance mechanisms have been developed in response to restrictions on foreign investment imposed by many governments in the region. For example, in Thailand, Indonesia, Sri Lanka and other countries in the region, build-operate-transfers (BOTs), as well as other variations of this model (including BTOS, BLTs and BOOTs), have been used to allow private investment while addressing legal restrictions on foreign ownership. In 1998, the Malaysian government raised the foreign ownership ceiling from 30% to 49%. After trying unsuccessfully to attract foreign investment, it increased the limit from 49% to 61%, excluding Telekom Malaysia. This 61% interest, however, is subject to certain conditions intended to limit a foreign investors ability to control a Malaysian company. The result is that the government will permit high foreign ownership when the risks are high but, as soon as the market levels out and maybe even begins to improve, foreigners must divest their interests. Similarly, in May 1998, the Telephone Organization of Thailand and the Communications Authority of Thailand agreed to allow debt-ridden operators usage of their concessions to fix their own foreign equity limits. Within days of this decision, TelecomAsia became the first operator in Thailand to offer majority control to foreign investors. On the other hand, Indians reluctance to raise the level of foreign ownership led British Telecoms, along with others to freeze all investment plans in the country. Liberalization As compared to other regions in the world, Asia has been hesitant to liberalize its telecommunications marketplace. With the advent of the current economic crisis, liberalization efforts appear to be coming at a faster pace. The question, however, is whether it is too little, too late. Hong Kong, for example, entered into an agreement with Hongkong Telecom to end the telecommunications operators monopoly over international services six years ahead of schedule. The government agreed to pay the company US$866 million and granted Hongkong Telecom the right to increase monthly line rental charges. Competition in international services began on January 1st , 1999 and competitors will be able to use their own facilities with effect from January 1st , 2000. To date, 47 companies have been licensed to provide international services in competition with Hongkong Telecom. In Japan, the government has taken several deregulatory steps. It now permits foreign investors to compete in the area of facilities-based telecommunications services and allows carriers to offer both domestic and international services. Deregulation has led to increased competition between providers and a reduction in the price for most telecommunications services. However, further deregulation may be required to allow carriers to lease facilities from other carriers, rather than require the establishment of their own circuits and switches. In addition, the prevailing economic crisis has had an impact on the governments plans to privatize state-owned telecommunications operators. . It still remains to decide which is the best way to accomplish reform of the telecommunications industry. The aforementioned may have an impact the speed at which liberalization is being accomplished. China is a notable exception in the efforts to liberalize the telecommunications market. Until recently, the China-China-Foreign (CCF) investment model allowed foreign companies to channel investments into the telecommunications sector through a series of joint ventures. The model was used extensively by China Unicom, a carrier set up in 1994 by the Ministry of Posts and Telecommunications to compete against the incumbent carrier, China Telecom. Under the CCF model, China Unicom was able to sign 46 contracts with 40 foreign companies, worth approximately US$1.4 billion. Today, foreign investments in China Unicom constitute more than 70% of the companys funding. In December 1998, however, the Ministry of the Information Industry declared the CCF model an irregular operation and, therefore, ordered a halt to any new such ventures. China Unicom must dispense with any foreign investment or joint venture, in order to simplify its ownership structure and raise funds under existing government policy (e.g., by floating shares on the securities market). While it is generally thought that the government will permit existing CCF investments to stand, it is unclear what it meant by requiring that China Unicom dispense with CCF projects, or how suspension of CCF investments may affect future foreign investments generally. Recently, the Chinese government announced it intention to break up China Telecom, the countrys long-standing telecommunications monopoly, into three regional firms. This offers some hope for competition into the Chinese market. However, it remains to see whether the proposed change will allow foreign investors to become directly involved in the telecommunications sector. China is under strong pressure to liberalize its telecommunications market, and allow foreign investment and competition as a condition of its accession to the WTO. The governments move may hint its intention to cede on certain points, but its stance on foreign investment remains a strong one. In fact, the governments intention to maintain a tight grip on its telecommunications market is exemplified by recent crackdowns on Internet telephony providers and its unofficial policy that service providers should only purchase Chinese-produced telecommunications equipment. Despite the economic crisis in Asia, investors are still participating in the telecommunications marketplace in the region, albeit taking a more cautious approach. According to industry analysts, leading stocks in the Asian telecommunications market have shown a better trend in recent months. Korea Telecom successfully completed an Initial Public Offering (IPO) in December 1998 which was well received by investors. The Korean government floated 16% of Korea Telecom on the stock exchange in Seoul and the offering attracted considerable interest among a wide range of investors. The attractiveness of the IPO largely rests on strong brand recognition. Nevertheless, investors are still concerned about issues such as the potential return on investment and market reforms. Though economic weaknesses persists in the region, some telecommunications financial analysts are optimisticthat Asian markets will improve in 1999. Companies such as Siemens and GlobalOne have announced that they will continue their strong presence in Asia. Further, demand for trans-Pacific transmission capacity has also prompted a slew of new submarine-cable projects, with over US$6 billion expected to be invested in fiber-optic cables in the region between 1998-2001. Although none of the proposed cable systems projects have been halted due to the economic crisis, some analysts predict that some of these cables will ultimately never reach completion or they will merge with other systems. In fact, one merger has already taken place between AT&T and KDD,( which was going to build the TPC-6 cable), WorldCom and Japan Telecom to build the U.S.-Japan system. Conclusion The current economic crisis in Asia and its resulting turmoil has naturally had an impact on telecommunications projects in the region. The negative effect of the crisis is making it more difficult for Asian companies to compete globally and access much needed investment and capital resources. It has caused many foreign investors to re-evaluate their risk exposure in the region and made them channel their resources elsewhere. Despite the turmoil, Asia remains a significant market for telecommunications projects and investment, and the current economic crisis may act as a catalyst for deregulation and competition. Such measures may help stabilize the market and serve as an attraction to investors.