June 14, 2009

Tapping the Power of Telecom

Telecom’s role as a stronghold of financial resilience can drive economic growth, now and after the downturn, if policymakers and regulators focus on preserving sector resilience under the new conditions.

Economic turmoil in international markets has left governments across the globe scrabbling for an economic recovery lifeline. In the MENA region, governments may be able to reach for telecom, which has traditionally shown financial resilience. Policymakers who take a broader look at the telecom sector and take action to release its catalytic potential now can create a multiplier effect that helps rejuvenate a nation’s entire economy, finds a new study by Booz & Company.

Rethinking strategic perspectives is essential, and through a targeted approach to regulatory change and cash injection, telecom offers a strong hand to lift economies back onto their feet. “At a time when MENA nations require financial security, they have a unique opportunity to transform their economies to be information-driven, with telecom at the core,” explained Karim Sabbagh, head of the global Communication, Media, and Technology practice at Booz & Company.

Rethinking Telecom Regulation

In the MENA region, telecom, a traditional pillar of financial resilience, may offer a route to economic recovery. It is therefore essential that policymakers and regulators strengthen the sector, by adjusting their strategies accordingly.

Current uncertainty presents an opportunity to broaden the boundaries of telecom’s domain and bolster other parts of the economy. “Organizations rely on telecom for their daily operations as do individuals, and therefore operators may have an opportunity to enter into new spheres of activity,” explained Bahjat El-Darwiche, a principal at Booz & Company.

MENA telecom operators are facing a number of new challenges: approaching market maturity, changing customer needs and preferences, and continuous transformation in technology, business, and operating models. There is a danger that the economic downturn could delay the industry’s ability to embrace these imperatives.

Policymakers and regulators must readjust their focus where needed and align telecom sector strategies with changing economic objectives, while focusing on creating long-term resilience and sustainable growth. Governments may need to reverse old trends and consider re-intervening in areas in which they have been disengaging. Cooperation between sector stakeholders is essential, requiring regulators and policymakers to address inefficiencies in sector governance and regulation, and implement elements that will create sustainable value.
Policymakers and regulators in the region should consider these six strategies:

  1. Review the schedules for privatization and liberalization

  2. Reduce operators’ direct financial obligations

  3. Invest in national broadband infrastructure

  4. Incentivize infrastructure sharing and traffic syndication

  5. Grow ICT literacy among users and the workforce

  6. Accelerate sector governance and regulatory reform

Review the Schedule for Privatisation and Liberalisation

Privatization and liberalization schedules outlined before the downturn may not now be viable. While there is room for more competition, sustaining existing players’ resilience must be a higher priority. Caution is necessary to attract solid, long-term investments, and rescheduling imminent privatization or the issuing of new licenses may be necessary.

Selling national assets now may not yield optimal returns and licensing new facility-based operators could have a negative impact on existing players’ incentive to invest. The Omani government postponed the sale of a 25 percent stake in state telecom firm Omantel in December 2008, in light of the deteriorating global economy and declining stock markets.

Policymakers and regulators should reconsider the timing of new facility-based licensing. Governments can potentially create value by attracting qualified players to invest in service-based licenses, and further liberalization should stay on the agenda for when the economic climate is more favorable. “The privatization and liberalization approach that regional telecom policymakers and regulators have taken so far has paid off. More well-timed moves would contribute to restoring investors’ confidence and supporting economic recovery,” stated Sabbagh.

Reduce Operators’ Direct Financial Obligations

Policymakers and regulators should ease financial pressure on telecom operators. Reducing license fees, spectrum fees, taxes, royalties on licensees, and high dividends on largely government-owned operators would help ensure the sustainability of competition, investment, and employment levels in the sector, as well as increased government proceeds in the long term. This could be an incentive for operators to invest further in network rollout and innovations in products and services, with a multiplier effect on the broader economy.

In previous crises, some regulators adopted a supportive approach toward licensees, easing financial obligations and ensuring a smoother ride through tough conditions. Telecom operators’ financial obligations must be robust enough to finance sector policy-making and regulation activities, as well as research programs and universal service funds. Financial obligations should be modest enough to make the sector attractive to increase reinvestments.

Many MENA countries impose higher direct financial obligations on telecom operators than contemporaries in more mature markets, which constitute a primary source of revenue for many MENA governments. “Allowing telecom operators to put more of their returns back into their business would sustain their competitive advantage in this cash-constrained environment, and improve their long-term economic prospects,” said El-Darwiche.

Invest in National Broadband Infrastructure

The regional trend has been to privatize telecom operators and let the private sector drive the pace and scope of investment in telecom infrastructure, yet individual operators are having difficulty securing investment in national broadband infrastructure, such as high-speed fiber-to-the-premises networks. “Governments may want to step in and consider playing a more active role in contributing to these investments, to expedite operators’ investment in national broadband infrastructure and improve the potential for value creation when the economy picks up,” Sabbagh stated. Government investment should focus primarily on passive infrastructure; active infrastructure, which can be a source of competitive advantage for operators, should remain under their jurisdiction.

Investment could come, as one alternative, in the form of government-backed utilities such as national network companies. They may involve existing operators, but would need to make their infrastructure available to all telecom operators and ICT service providers. The potential benefits are better access to customers, higher bandwidth, economies of scale, and new applications that would benefit the economy.

Government investment could also come in the form of grants to operators, provided that they offer incentives to encourage end users to upgrade to next-generation broadband access.

Stimulation of the sector could generate a comparable network effect and jump-start the wider economy. These initiatives are based on the assumption that such investment leads to direct job creation, and enables the development of new businesses that create innovative products and services using the improved capabilities of the communications network.
Governments are taking a progressive view of infrastructure as an essential part of an economy, and the role of government in the provision of it. In doing so, governments will lay the foundation for the sector to be stronger after the downturn while stimulating the economy now. National broadband infrastructure is key for the sector’s future development, as well as broader national economic development.

Incentivize Infrastructure Sharing and Traffic Syndication

With limited market liquidity, MENA policymakers and regulators should consider incentivizing operators to undertake infrastructure-sharing projects together to allow more effective management of the financial resources available to them, without giving up their competitive advantage.

Governments could relax selected regulations in return for operators’ commitment to infrastructure sharing. “The objective would be to create incentives for more cooperation, to take advantage of possible economic efficiencies and to push for these efficiencies to be realized on a mutually agreeable commercial basis,” El-Darwiche commented.

Infrastructure sharing is often a source of tension between regulators and operators, as it is traditionally imposed as a regulatory obligation; it has previously succeeded when done on a market-driven basis. Regulatory intervention could push for mandatory infrastructure sharing in cases of abuse by dominant powers, or market failure. The MENA region has already started to see market-driven infrastructure-sharing deals supported by some policymakers and regulators.
“Regulators could also intervene to promote the development of traffic syndication ventures, such as regional roaming hubs or Internet exchange points. In so doing, regulators can bring related benefits such as cost efficiencies, network performance improvement, and increased reliability to all market players,” El-Darwiche explained. As competition matures in the MENA region, market-driven infrastructure sharing and traffic syndication ventures have started to emerge. Thus far incumbent operators, which control a large part of the infrastructure, have been conservative in offering infrastructure-sharing deals and have usually done so in reaction to regulatory pressure.

Grow ICT Literacy among Users and the Workforce

The development of ICT literacy and investment in national broadband infrastructure must be synchronized to achieve value. Without the necessary human capital, technological advances in telecom networks and services cannot be effectively employed to generate innovation and drive economic growth.

Public familiarity with ICT is essential for the widespread adoption of digital services. Governments in the region could take advantage of the downturn to broaden investments in ICT initiatives that enhance and develop ICT knowledge and adoption throughout the population.

“MENA governments should encourage their citizens to use online services with convenient, affordable access and by emphasizing the time and money savings by using e-government services,” Sabbagh said. Structuring an official education framework and defining quality criteria for courses would lend integrity to ICT qualifications. Governments could even facilitate interaction between academic programs and the ICT private sector. This is especially the case with the downturn intensifying the need for a workforce that can meet private-sector demands for talent, and given that regional ICT literacy rates are still relatively low compared to other countries.

Investing in ICT literacy would accelerate ICT adoption, encourage digitization of the economy, promote investment in ICT, increase individual productivity, and create a more highly skilled and competent workforce. ICT investment would act as an economically stimulating venture in the short term, and is essential for the long-term development of the telecom sector.

Accelerate Sector Governance and Regulatory Reform

The telecom sector’s ability to act as a catalyst for economic recovery is dependent on three factors: the ability of regulators and policymakers to effectively fulfill their various functions, the level of integration between governance of the telecom sector and governance of media and technology, and the level of maturity of regulatory practices.

Telecom policy making and sector development should be clearly distinguished from regulatory activities. Long-term strategic planning should be rapidly institutionalized to promote the sector as an economic enabler. “The capabilities for effectively driving high-impact sector development initiatives also need to be swiftly built to support government investment and public–private partnership initiatives,” explained Sabbagh.

In terms of regulatory reform, improving sector resilience and laying the groundwork for sustainable growth require transparency in regulatory practice. Publishing regulatory development plans and gaining public support for decisions should help build investor confidence and enable growth. Regulators should also rapidly step up their economic assessment capabilities and base decisions on thorough analyses that guarantee value creation and efficiency for sector stakeholders: customers, operators, investors, and the government.

Finally, regulators need to exercise increased vigilance and scrutiny when it comes to anticompetitive behavior and market value destruction, else the sector may be unable to attract investment, and operators may find it difficult to adopt new business models after the downturn. Concentrating on reform now would focus resources on generating maximum returns from past initiatives and would create an encouraging environment for new initiatives. When previous growth avenues are less attractive, developing best practices in governance and regulatory reform will set the stage for world-class performance when the economic winter passes.