Least cost subsidy auctions for universal access telecom projects a practical implementation guide
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Hank Intven & Curt Howard EBRD, IDRC, JICA, Keio University ICT Seminar Tokyo, August 25, 2004 PowerPoint PPT Presentation


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Least-Cost Subsidy Auctions for Universal Access Telecom Projects : A Practical Implementation Guide. Hank Intven & Curt Howard EBRD, IDRC, JICA, Keio University ICT Seminar Tokyo, August 25, 2004. Summary. Purpose of Presentation Universal Access Strategy Least-Cost Subsidy Auctions

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Least cost subsidy auctions for universal access telecom projects a practical implementation guide

Least-Cost Subsidy Auctions forUniversal Access Telecom Projects:A Practical Implementation Guide

Hank Intven & Curt Howard

EBRD, IDRC, JICA, Keio University ICT Seminar

Tokyo, August 25, 2004


Summary

Summary

  • Purpose of Presentation

  • Universal Access Strategy

  • Least-Cost Subsidy Auctions

  • Auction Process & Documents

  • Project Implementation Plan


Purpose of presentation

Purpose of Presentation

  • A “big picture” summary of the least-cost subsidy auction approach to expanding telecom network access

  • Review of process & documents to implement an auction

  • Review of practical implementation issues


Universal access strategy

Universal Access Strategy

  • Regulators and government policy makers to develop Universal Access (UA) strategy to meet specific national or regional needs

    • Take stock of current and projected

      • telecom infrastructure and services

      • demand for services

    • Identify “gap” in infrastructure & services

    • Make policy to help fill gap

    • Least-cost subsidy auctions can use small subsidies to stimulate private sector investment to fill the gap & meet UA policy goals


Hank intven curt howard ebrd idrc jica keio university ict seminar tokyo august 25 2004

market efficiencygap

real access gap

access targets

access today

Poverty

Commercially feasible

Needs intervention

Customerhousehold penetration

Geographic isolation

►Subsidy required to fill ‘real access gap’

►The ‘Two Gaps’ Source: World Bank Discussion Paper No. 432, “Telecommunications & Information Services for the Poor…”


Least cost subsidy auctions

Least-cost Subsidy Auctions

  • Recognizes that a subsidy may be required to make network expansion economic in rural and high cost areas

  • Subsidy is efficiently targeted and auctioned to ensure least cost to funding agency

  • Proven approach for expansion of UA to telecommunications networks

    • Successful pioneer projects in South America (Chile, Peru, Colombia)

    • We advised Nepal NTA on implementing large rural UA project; and are currently advising Sri Lanka, Nigeria, Uganda and Burkina Faso

    • Other subsidy auction projects underway in Eastern Caucasus, Russia, Nicaragua, Bolivia, etc.


Basics of subsidy auction approach

Basics of Subsidy Auction Approach

  • Define network expansion requirements - e.g. network with X capacity and Y performance criteria in Z locations

  • Run a transparent auction process for private operators to expand network

  • Qualify all interested bidders technically and financially capable of expanding network

  • Provide subsidy to the qualified bidder that requires lowest subsidy


Advantages of subsidy auctions

Advantages of Subsidy Auctions

  • Auctions usually provide a one-time investment subsidy for private operators willing to expand network and provide required service

  • Well-run auction reduces size of subsidy and need for government financing

  • Market forces rather than the government determine the level of subsidy required

  • Auctions are competitively neutral and thus compliant with WTO rules for UA

  • Small subsidies can mobilize substantial private investment for UA


Financing the subsidies

Financing the Subsidies

  • Subsidies may be financed by a UA Fund or by other sources, such as International Financial Institutions (IFIs) or international development agencies

  • UA Funds may be funded by :

    • Mandatory contributions from all telecom service providers (e.g. a specified percentage of revenue)

    • National budgets (tax revenues)

    • Contributions from IFIs?


Size of rural subsidies source adapted from world bank data

Size of Rural SubsidiesSource: Adapted from World Bank Data


Designing the project

Designing the Project

  • Properly designing the infrastructure and services to be supplied is key to success in meeting UA needs

  • National UA policy/strategy

    • Usually defines general UA goals - generally does not specify network gaps to be filled or economic implications

  • Technical and service requirements

    • Network specs. – fixed, mobile, broadband – mixed

    • Services – e.g. public telephones, Internet access, call centres

    • Geographical coverage areas, rollout schedule


Designing the project 2

Designing the Project (2)

  • Market demand study

    • Review population dispersion, income, available services, unserved areas, etc.

    • Can assist in identifying demand for:

      • Network expansion

      • Types of services required and financially feasible (e.g. telephone, low or high speed Internet, shared telecentres, etc.)

      • Estimated revenues & subsidy requirements

    • Subsidy should cover net cost of network expansion – i.e. after deducting projected revenues from area to be served

    • Rule of thumb: Public will pay 2-3% of income for telecom services (next slide)


Designing the project 3 telecom revenues as of gdp

Designing the Project (3)Telecom Revenues as % of GDP


Implementing the project subsidy auction documents

Implementing the Project:Subsidy Auction Documents

  • Key documents often include:

    • a Request for Applications to Pre-Qualify (‘RFPQ’)

    • a Request for Proposals (‘RFP’)

    • a contract for the provision of the services and payment of the subsidy (the ‘Service Agreement’)

    • a licence to operate the new network and provide the services (the ‘Licence’)

    • ‘Ancillary documents’ (bid bonds, performance guarantees, etc.)


Request to pre qualify

Request to Pre-Qualify

  • RFPQs are often the initial document to ‘kick-off’ the process to award the Service Agreement and Licence to the lowest bidder

  • The RFPQ will often:

    • Introduce potential bidders to the project

    • Provide some background information on the national or regional telecom sector

    • Serve as an initial screening process for parties that will be permitted to participate in the full competition process initiated by the RFP


Request to pre qualify 2

Request to Pre-Qualify (2)

  • Is prequalification process necessary?

    • Eliminating it can speed up process

  • However, a pre-qualification process can

    • Significantly reduce the number of bidders that participate in the full auction process (in some of our processes, 50+ bidders have applied)

    • place the focus on the best qualified bidders, and reduce problems and litigation from technically or financially unqualified bidders

    • Significantly reduce costs incurred by

      • less ‘serious’/qualified bidders who must otherwise prepare full proposals

      • funding agencies and their advisors that must fairly review and evaluate all proposals


Request for proposals rfp

Request for Proposals (‘RFP’)

  • Different terminology: RFP, Request for Applications, Tender document, etc.

  • Defines steps in competition process, and award of subsidy and Licence.

    • Should detail procedures for:

      • filing of proposals, opportunities for clarification questions, bidders conferences, revisions of RFP, and basic rules of competition

      • format and contents of proposal and information to be submitted

      • the evaluation of proposals – ‘licensing criteria’ must be provided under WTO Reference Paper

      • the selection of the successful bidder

      • the award of the Service Agreement and Licence


Service agreement

Service Agreement

  • Agreement is a good basis for governing payment of the subsidy – provides contractual certainty to permit financing of project – and service requirements

  • Alternate approaches can include licence conditions and letter of credit from UA Fund

  • Service Agreement specifies:

    • Network construction milestones, and service rollout

    • Technical performance requirements, including services to be provided, quality of service, etc. (similar to commercial telecom service agreements)

    • Penalties and remedies for failure to perform…


Service agreement 2

Service Agreement (2)

  • Service Agreements should also provide:

    • Procedures for certifying completion of phases of project & subsidy payments

    • Dispute resolution procedures

    • Other commercial provisions

      • Representations & Warranties

      • Performance guarantees

      • Term, termination & amendment rules

      • Force majeure and non-performance

      • Insurance, indemnity, etc.

      • Other standard commercial agreement terms


Telecom operating licence

Telecom Operating Licence

  • Most countries’ laws require a licence to construct and operate networks and to provide basic telecom services

  • Licences typically contain main operational rights and obligations of telecom service providers

  • The operating rights and obligations of a licence are usually supplemented by

    • the subsidy-specific requirements of the Service Agreement (i.e. regarding construction and operation of the expanded network), and

    • general telecom laws and regulations


Licence to operate new network 2

Licence to Operate New Network (2)

  • Various licensing approaches:

    • New licence designed for UA project

    • Adapt standard form of licence issued by Regulatory Authority

    • Amend licence of an existing operator, if an existing operator should win the competition for the subsidy contract

  • Spectrum licences

    • may be required in addition to operating licence

    • should be granted as part of initial licensing process without further cost or delay


Possible implementation plan

Possible Implementation Plan

  • Develop or revise UA Policy

  • Amend any laws or policies to facilitate least-cost auction process

  • Undertake demand study/financial analysis of specific project(s) to be subsidized

  • Determine outputs: services & infrastructure - technical design and performance requirements

  • Prepare auction process documents

  • Identify possible bidders, issue RFPQ and commence marketing activities


Possible implementation plan 2

Possible Implementation Plan (2)

  • Evaluate applications to pre-qualify

  • Issue RFP document to pre-qualified parties

  • Questions of clarification from bidders (and entertain proposed changes?)

  • Conduct pre-bid meeting with pre-qualified parties

  • Answer questions of clarification and make necessary changes to process to meet market requirements


Possible implementation plan 3

Possible Implementation Plan (3)

  • Deadline for submission of proposals

  • Evaluate proposals

  • Option: Issue of Letter of Intent to the qualified bidder(s) with lowest subsidy bid; (i.e. intent to award subsidy once any necessary preconditions are met)

  • Winning bidder(s) comply with preconditions (e.g. incorporation of local company, submission of performance guarantee, etc.)

  • Execute Service Agreement and issue Licence


Possible implementation plan 4

Possible Implementation Plan (4)

  • Winning bidder(s) begin network rollout

  • Subsidy payments made in accordance with service rollout milestones

  • Ongoing monitoring and reporting requirements

  • Network rollout and subsidy payments completed in accordance with schedule in Service Agreement


Role of professional advisors

Role of Professional Advisors

  • Assist with

    • design of UA policy/strategy

    • demand studies, technical and financial analysis to define network ‘gap’ to be filled

    • designing technical & service requirements

    • preparing auction process documents

    • running auction process – marketing, bidder conferences, Q&A, revising structures to meet market demands, problem-solving

  • Advise on best international practices and their application to the local environment

  • Expedite implementation through use of proven precedents and problem-solving approaches


Keys to a successful auction

Keys to a Successful Auction

  • Assess market demand and business requirements of service suppliers; match both to develop a financially realistic project

  • Establish key regulatory conditions (e.g. tariff policies, interconnection rates, market exclusivity, etc.) to reduce financial risk

  • Reduce unnecessary regulation and government impediments to investment

  • Develop a clear and transparent auction process – use standard commercial and regulatory approaches that will promote regulatory and business success


Hank intven curt howard ebrd idrc jica keio university ict seminar tokyo august 25 2004

For Further Information:Hank Intven: [email protected] Howard: [email protected] Tétrault LLPSuite 4700, TD Bank Tower, 66 Wellington St. WestToronto, ON Canada M5K 1E6Tel: +1 (416) 601-7878Fax: +1 (416) 868-0673


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