|Africa and the Middle East 2009
|Policy and regulation – overcoming economic challenges
|Bahjat El-Darwiche and Jonathan Fiske
|Bahjat El-Darwiche, Principal and Jonathan Fiske, Senior Associate
|Booz & Company
Bahjat El-Darwiche is a Principal with Booz & Company and a leadership member of the Communications & Technology Practice in the Middle East. Mr El-Darwiche has 14 years of strategy and business experience in the telecommunications sector acquired through various engagements in the Middle East, Europe, North America and Asia. Mr. El-Darwiche advises governments, regulatory authorities and telecom operators and has led engagements in the areas of telecom sector liberalization and growth strategy development, policy making and regulatory management, business development and strategic investments, corporate and business planning, and privatization and restructuring. Bahjat El-Darwiche holds a state engineering diploma from the Ecole Polytechnique in France and a MS degree in Telecommunications from the Ecole Nationale Supérieure des Télécommunications in Paris. Jonathan Fiske is a Senior Associate with Booz & Company and a member of the Communications & Technology Practice in the Middle East. Mr Fiske has more than 12 years of regulatory and policy experience in the telecommunications sector acquired through various engagements in the Middle East, Europe, Africa and Asia. He advises telecom operators, governments and regulatory authorities. Mr Fisk has also led engagements in the areas of regulatory management, licensing, telecom sector policy-making and regulatory development. Jonathan Fiske holds a Doctorate in Competition Law.
Regulators play a central role in the development of a healthy telecom sector especially in regions such as the Africa and Middle East where growth is recent and the maturity of markets varies widely throughout the region. The ICT sector, indeed the economic and social development of the region, depends strongly upon the sustained growth of the telecom sector. This, in turn, depends greatly upon adequate regulatory conditions – transparency, predictability, liberalisation, adequate financial stimulus, infrastructure sharing and governance reform.
The continuing economic downturn has created waves that have affected telecom sector policy-makers’ and regulators’ aspirations for further market competition, and for ICT enrichment of their country’s economy. The consequence is that new strategies are required for sector development. Both policy-makers and regulators in the Middle East and Africa region (MEA) have performed key roles in enabling people to have access to telecommunications services, through market liberalization. Most notably, mobile and wireless became the predominant means of telecommunication access in the region, due to the ease of roll-out and connectivity to users. However, despite the healthy growth in telecom access and services experienced by MEA countries over the past decade, the financial landscape has changed. Exhibit 1: MEA Region Telecoms Penetration The economic downturn, and uncertainty about how long a full economic recovery will take, influences telecom providers’ investment plans and access to resources. Reduced sector investment by providers challenges the policy-makers’ aspirations for the sector and for furthering ICT use; including the extent of telecom coverage and form of service provision that could be achieved for users nation-wide. In addition to building their balance sheets, MEA operators are facing a number of new challenges: some markets are approaching maturity, the needs and preferences of customers are changing, and the industry is witnessing continu¬ous transformation in technology, business and operating models. Challenges facing operators in other markets include low average revenue per user (ARPU) rates; markets requiring higher customer bases yet face the threat from new entrants; network coverage; and quality of service (QoS) obligation pressures from authorities. There is a danger that the economic uncertainty could delay the industry’s ability to address these. Given the economic climate, and the stage of their country’s telecom market development, MEA policymakers and regulators should challenge their ongoing strategies and practices. Where appropriate, they should readjust their focus and approach, by aligning their telecom sector strategies with changing national economic objectives, and shifting their focus from quickly extracting value to creating long-term resilience and sustainable growth. They should also find ways of enhancing ICT literacy; this helps spur market growth and investment through increased take up of services. Cooperation between sector stakeholders is essential, whether regulators and operators or incumbents and new entrants. Policymakers and regulators also need to rapidly address inefficiencies in sector governance and regulation, as they put in place the elements that will create sustainable value. Policymakers and regulators in the MEA region should consider essential strategies to support telecom sector resilience, and leverage telecom as a key supporter of the rest of the economy. In this context, authorities should pursue the following four strategies: 1. Review the schedules for liberalization; 2. Reduce operators’ direct financial obligations; 3. Incentivize infrastructure sharing; and 4. Accelerate sector governance reform and initiatives Liberalization Market liberalization remains a key facilitator of sector investment, innovation and economic efficiencies throughout the market. Under challenging economic conditions, policymakers and regulators should review liberalization practices, and determine whether they remain appropriate. Institutionalization of long-awaited sector governance and regulatory reform should be accelerated. There is room for more competition in most MEA region markets, but sustaining existing players’ resilience needs to be a higher priority at this stage than the rapid introduction of further competition. Caution is necessary to attract solid and long-term investments to the sector. In some countries the issuance of some types of new licenses might be rescheduled, especially those involving capital intensive investment. Others, such as service-based licenses, might be brought forward to stimulate other sectors. Financial obligations Many MEA countries continue to impose higher direct financial obliga¬tions on telecom operators than do their contemporaries in more mature telecom markets. Proceeds from the telecom sector constitute a major source of revenue for many govern¬ments in the region. Financial obligations should always be modest enough to make reinvestments attractive. Governments and regulators should ease financial pressure on telecom operators to better allow them to make the necessary strategic choices in a cash-constrained environment. Reducing license fees, spectrum fees, taxes, royalties and other institutionally imposed costs on licensees, would help ensure the sustainability of competition, investment, and employment levels in the sector. In previous economic crises, some regula¬tors adopted a supportive approach toward licensees, easing financial obligations and ensuring a smoother ride through tough market conditions. In Italy, licensees were granted an extended license period; in France, an extended rollout period; and in Spain, staggered license payments. Singapore lowered license fees and relaxed nationwide rollout requirements. In the Middle East, Bahrain reduced the annual license fees for telecom operators in the country by 20 per cent in anticipation of the current downturn. Easing financial pressures actually leads to increased government revenues in the long term, as bolstering the sector improves ICT uptake and has a multiplier effect on the economy. This measure could provide support to operators with costly rollout obligations, and act as an incentive to invest further in network improvements, products and service innovation. Such investments would have a multiplier effect on the broader economy, while at the same time increasing both direct and indirect government returns. This may be the right time to start looking at the sector from a broader angle – not simply as a revenue generator, but as an engine to power the economy. Allowing telecom operators to put more of their returns back into their business would not only sustain their competitive advantage in this cash-constrained environment, but also improve their long-term eco¬nomic prospects. Such consideration should also be made in countries with longer-term economic challenges. Infrastructure sharing incentives Regulators often require operators to rollout their networks independently to ensure alternative networks are available in the market. Countries requiring coverage by multiple networks in sparsely populated regions are a real challenge for operators and investors. Liquidity and funds for investment are limited in such markets, so returns on investment need to be ensured. MEA policymakers and regulators should consider giving operators incentives to undertake infrastructure-sharing projects that will let them manage the financial resources available to them more effectively, without giving up their competitive advantages. Regulators should also adopt spectrum neutrality (i.e. remove barriers to using 2G and 3G technologies in lower frequency bands to allow greater coverage) and introduce spectrum trading, to enable more efficient use of scarce resources. In some markets, infrastructure sharing is an obligation, guaranteeing access to essential infra¬structure and end customers for other market players. This, though, can build tension between regulators and operators. Nevertheless, passive infrastruc¬ture sharing can succeed when done on a market-driven basis, supported by dispute resolution as a last resort. Exhibit 2: Infrastructure Sharing Options To encourage sharing, governments might relax selected regulations in return for operators’ commitment to infrastructure sharing – for instance, bypassing tariff regulations for incumbents and reducing network deployment obligations for new entrants. The objective would be to create incentives for more cooperation and to push market players to realise efficiencies on a mutually agreeable commercial basis. Sector governance and regulatory reform Although the telecom sector is an enabler for the wider economy, its ability to act as a catalyst for economic recovery is closely linked to other factors. Among these factors are the ability of regulators to effectively fulfil their various functions, the level of integration between governance of the telecom sector and the governance of media and technology and the level of maturity of regulatory practices. The functions of telecom policymaking and sector development should be clearly distinguished from regulatory activities. The rapid institutionalisation of long-term strategic planning that effectively links telecom sector objectives and priorities to the rest of the economy can promote the sector as an economic enabler. This may require closer integration between telecom, media, and technology governance. With mature regulatory practices, operators can adopt more progressive approaches to their business. Regulations which guarantee technological neutrality, for example, allow greater flexibility in choice of technologies. This facilitates the adoption of advanced network architectures where technologies and infrastructures complement one another to achieve wider, more cost effective, network coverage and, thereby, create an environment more conducive to investment. Transparency in regulatory practices is the basis, the foundation, for mature regulatory processes; transparency is especially needed to improve sector resilience encourage sustainable growth. The publication of regulatory development plans and clear, rational, decisions are vitally important to earn public support, boost investor confidence and stimulate longer-term investment and overall growth. The four strategies we have set out offer direct actions that telecom sector policymakers and regulators can take to strongly support the sector’s stability and to stimulate further investment. Given the recent economic downturn and its overall impact, strategic rethinking of policy and regulatory perspectives is essential to create the necessary building blocks for the continued development of an information-driven economy with telecom at its core.