miercuri, 12 octombrie 2011

Privatization of Moldtelecom potential for development or creation of a private monopoly

The subject of the privatization of the state owned incumbent operator Moldtelecom is a hot topic for the past decade in Moldova. The acting government has asked the International Finance Corporation technical assistance to propose options for privatization.

Indeed there could be many options and strategies for privatization given the sheer size and complexity of Moldtelecom and the regulatory environment it works in which largely has been shaped to cater to its own needs.

Traditional assumption of many economists is that if Moldtelecom is no longer a stated owned company, it will no longer enjoy privileged relations with the later and exposed to market forces will have to adjust to operate in a more efficient manner and eventually would yield to Moldovan state more money in taxes than it currently does in taxes plus dividends. Moreover once it no longer has the privileged relationship with policy makers the other players would enjoy a fairer treatment and therefore the market forces are expected to work better.

Before making any statements whether these assumptions are right or wrong one needs to understand the environment in which Moldtelecom does operate. I will briefly define the main political, economical, social and technological features inherent to the environment.

Political Factors:

ANRCETI is the specialized regulator in electronic communications formally independent from government interference. However the Director and his deputies are appointed by the Government of Moldova. Currently it struggles in imposing a number of remedies on Moldtelecom and other operators. It is dependent on international donors to put up necessary regulations (USAID and most recently EBRD) and enforcing it (World Bank through DPL operations).

Ministry of ICT is the main policy maker in electronic communications and is supposed to offer equal treatment to the industry. The reality is that one of the deputy ministers of ICT is a board member of Moldtelecom which creates potential for conflict of interest between policy making and defending economic interest of Moldtelecom. Another noteworthy factor is that the same Deputy Minister and the Minister of ICT belong to the same political party.

A vocal public dispute between the Prime Minister and his Deputy, Minister of Economy took place in early 2011 over the issue of tariffs rebalancing for fixed telephone service. Neither of the parties paid due attention that a meaningful rebalancing could have occurred after the costs to provide the service by Moldtelecom are revealed by implementation of proper cost accounting. Later in April 2011 separate cost accounting was mandated by ANRCETI  and it is yet to be implemented by the incumbent.

Economic Factors:

Income disparity in urban and rural areas with corresponding demand levels coupled with relatively lower unit capital costs to build urban access infrastructure and relatively high CAPEX in rural areas drive the competition level high in cities and oftentimes leave Moldtelecom as the only supplier of PSTN, ADSL and TV service in many rural areas.

Fixed telephony is believed to be cross-subsidized by international one. Still, this assumption needs to be verified by implementing the mentioned regulation of ANRCETI on mandating separate cost accounting.

Switching costs to alternative providers of wired electronic communications are considerable given the fact that last mile connections were historically built by subscribes, particularly corporate customers and transferred to the property of Moldtelecom.

Entry barriers are erected in form of high tariffs to use passive infrastructure such as ducts and poles owned by Moldtelecom are high and non transparent. Further technological reasons are invoked to justify high tariffs.

The competition in provision of broad band internet service is tough in urban areas driving down the prices in absolute terms and putting pressure on all operators to increase access speeds. Currently, according to Ookla, Moldova has one of the lowest price per Mb (USD1.31 and ranks fifth worldwide) still in relative terms it represents 11.37% of GDP per capita putting Moldova on place 57 worldwide.

Social Factors:

High outmigration, particularly from rural areas generates high volume of incoming international calls with corresponding high termination fees and creates demand for broadband services to reap the benefits of alternative communications and social networks.

Technological Factors:
Essential passive infrastructure difficult to replicate is overwhelmingly in the hands of Moldtelecom and most often alternative operators choose to build alternative access networks using poles owned by other public utility operators (electricity distribution and trolleybus companies).

International connectivity was liberalized in april 2010 and resulted in competition on this specific market which translated into lower retail prices and exponentially higher broadband speeds.

Technically Moldtelecom offers bitstream access to alternative operators to solve the issue of distribution networks. It was mandated by ANRCETI to Moldtelecom but the price offering appears prohibitive to the majority of ISPs. Having a proper cost accounting as discussed earlier should provide basis for setting a cost based non discriminatory price offering.

Urban areas are becoming covered by a few distribution networks and at least two cover the entire stock of multi level housing blocks thereby increasing the payback time for all operators.

Mobile radio access networks are covering the largest part of the country but the collaboration between MNO's is limited to sharing elements of the passive infrastructure such as poles only in very few cases. Active infrastructure is not shared. This results in heavily underutilized infrastructure outside populated areas and little incentives to improve the coverage of 3G networks. 

Having outlined the main factors shaping the environment, I would briefly sketch out a few possible scenarios of privatization of Moldtelecom and main implications. Clearly this is not an exclusive set of options.

A. Privatize "as is", selling in one transaction the whole company with all passive and active infrastructure and core network. 

The main outcome of such a transaction would be the emergence of a private monopoly or private dominant operators in certain markets including those critical to the development of terrestrial access and transport networks. Would such an arrangement benefit damage the industry? Clearly, in the absence of due remedies imposed by ANRCETI, the private operator could further restrict the access to the essential infrastructure.

Another possible outcome could be that the privatized incumbent might find it difficult to further deploy its network because of lack of clear procedures regarding the rights of way and coordination difficulties with other agencies.

B. Separate Moldtelecom into business entities corresponding to different network layers or lines of business: Distribution Network, Transport Network, Ducts Infrastructure, Wired Retail, Wireless Retail, Radio Access Network, etc The conventional assumption about this scenario is that every unit will have to maximize the service sold and therefore will sell to a maximum number of customers thereby creating equal conditions for development of all other operators. In practice this can result in increased administrative cost, difficulties of coordination, impossibility to implement a common development strategy of a tier one integrated operator. 

C. Improve corporate governance, strengthen the regulatory regime and apply effective remedies then privatize when market conditions are right. This option, although more labor intensive on preparation phase can actually result in better development outcomes. The governance structure of Moldtelecom could be changed to eliminate the potential for conflict of interest between policy making duties of certain directors and their fiduciary responsibility to pass decisions leading to superior economic results for the incumbent. In that vein the company would benefit of professional and politically independent directors be appointed. 

The accounting separation of costs relevant to provide each service should provide a sound foundation for tariffs setting in a cost based and not discriminatory manner. To that effect adherence to the accounting separation regulation passed by ANRCETI is needed. Universal service obligations are to be considered carefully, including market driven options for universal service such as a targeted voucher scheme for the vulnerable segments of population.

In conclusion, I would like to stress that the Government of Moldova would be better off in the long run if it has very clear developmental objectives before privatizing Moldtelecom. The privatization is not an end in itself but only one of the options to achieve developmental objectives such as improving the availability of electronic communications services, strengthening the competition within the industry, improving the access to the essential infrastructure owned by Moldtelecom on a nondiscriminatory basis for other operators to diversify the service offering to the end consumer. While fiscal considerations are also important, one should be mindful that further investments in deployment of modern networks such as LTE could postpone fiscal revenues in forms of income tax to an indefinite term.  

Un comentariu:

Dorin spunea...

Vicu, forget about the privatization! All the state-owned big boys represents revenues centers generating streams of positive cash flows for the politicians. :)))
The current paradigm fully comply with the politician's needs.