Policy and Regulation in Telecommunications Paul Moffatt, Counsel, EBRD Sarajevo, 19 April 2002

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Policy and Regulation in TelecommunicationsPaul
Moffatt, Counsel, EBRDSarajevo, 19 April 2002
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Policy and Regulation in the Telecommunications
Sector

• EBRD participation in the Telecommunications
  Sector
• Purpose of Telecommunications Sector Policy
• Key sector objectives
• Expected evolution of the sector
• Initiatives for achieving sector objectives
• Current sector status
• Current sector issues
• Summary of recommendations for further development

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EBRD 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
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EBRD Participation in Telecommunications

• Three general forms of participation in the
  sector
• Legal transition programme
• EBRDs initiative to contribute to the
  improvement of the investment climate in the
  Banks 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

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Purpose of Telecommunications Sector 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.

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Principle Objectives of Sector Policy

• 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.

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Economic and Social Policy Objectives

• 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

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Expected Evolution of the Sector

Medium Term
Long Term
Start
Independent Regulator Established
Competitive Market
State Ownership Regulation
Public Monopoly of Telecom Services
Competitive Safeguards in Place
Privatise Incumbent(s)
Selected Services Opened to Competition
Liberalisation of all telecom services
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Initiatives for Achieving Sector Objectives

• 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.

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Initiatives - Liberalisation

• An 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.

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Initiatives - Attract Investment (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.

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Initiatives - Attract Investment (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.

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Initiatives - Attract Investment (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.

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Initiatives - Attract Investment (4)
Impact of Privatisation
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Initiatives - Attract Investment (5)
Impact of Privatisation - Economy-wide Foreign
Direct Investment
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Current 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.

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Current Sector Status - Regulatory Framework

• A large part of a regulatory framework is
  already in place in BiH, in the form of the CRA.
  Among CRAs 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.

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Current Policy and Regulatory Issues

• 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.

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BiH Framework Telecommunications 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.

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BiH Framework 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.

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Regulation 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.

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Separation of Post From Telecommunications

• 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.

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Corporate Structure of BiH Operators

• 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
  todays 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

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Tariffs

• 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.

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Tariff 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.

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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.

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Universal 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
  todays 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.

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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

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Summary 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